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Share Name | Share Symbol | Market | Type |
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Coca Cola HBC Ltd (PK) | USOTC:CCHBF | OTCMarkets | Common Stock |
Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
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-2.01 | -5.49% | 34.50 | 34.15 | 38.10 | 34.50 | 34.50 | 34.50 | 162 | 21:07:30 |
D IREXION S HARES E TF T RUST
PROSPECTUS
1301 Avenue of the Americas (6th Avenue), 35th Floor | New York, New York 10019 | 866-476-7523 |
3X BULL FUNDS | 3X BEAR FUNDS | |
I NTERNATIONAL F UNDS | ||
Direxion Daily Chile Bull 3X Shares | Direxion Daily Chile Bear 3X Shares | |
Direxion Daily Hong Kong Bull 3X Shares | Direxion Daily Hong Kong Bear 3X Shares | |
Direxion Daily Japan Bull 3X Shares (JPNL) | Direxion Daily Japan Bear 3X Shares (JPNS) | |
Direxion Daily Mexico Bull 3X Shares | Direxion Daily Mexico Bear 3X Shares |
JUNE 22, 2013
(As supplemented June 26, 2013)
The funds offered in this prospectus (collectively, the Funds) trade on, or will trade on, NYSE Arca, Inc. The Funds seek daily leveraged investment results and are intended to be used as short-term trading vehicles. The Funds with Bull in their names attempt to provide daily investment results that correlate to the performance of an index or benchmark and are collectively referred to as the 3X Bull Funds. The Funds with Bear in their names attempt to provide daily investment results that correlate to the inverse (or opposite) of the performance of an index or benchmark and are collectively referred to as the 3X Bear Funds. The Funds are not intended to be used by, and are not appropriate for, investors who do not intend to actively monitor and manage their portfolios. The Funds are very different from most mutual funds and exchange-traded funds. Investors should note that:
(1) The Funds pursue daily leveraged investment goals, which means that the Funds are riskier than alternatives that do not use leverage because the Funds magnify the performance of the benchmark of an investment.
(2) Each 3X Bear Fund pursues investment goals that are inverse to the performance of its benchmark, a result opposite of most mutual funds and exchange-traded funds.
(3) The Funds seek daily leveraged investment results. The pursuit of these investment goals means that the return of a Fund for a period longer than a full trading day will be the product of the series of daily leveraged returns for each trading day during the relevant period. As a consequence, especially in periods of market volatility, the path of the benchmark during the longer period may be at least as important to a Funds return for the longer period as the cumulative return of the benchmark for the relevant longer period. Further, the return for investors that invest for periods less than a full trading day or for a period different than a trading day will not be the product of the return of the Funds stated goal and the performance of the target index for the full trading day. The Funds are not suitable for all investors.
The Funds are designed to be utilized only by sophisticated investors, such as traders and active investors employing dynamic strategies. Such investors are expected to monitor and manage their portfolios frequently. Investors in the Funds should:
(a) understand the risks associated with the use of leverage,
(b) understand the consequences of seeking daily leveraged investment results,
(c) understand the risk of shorting, and
(d) intend to actively monitor and manage their investments.
Investors who do not understand the Funds or do not intend to actively manage their funds and monitor their investments should not buy the Funds. There is no assurance that any of the Funds offered in this prospectus will achieve their objectives and an investment in a Fund could lose money. No single Fund is a complete investment program.
If a Funds underlying benchmark moves more than 33% on a given trading day in a direction adverse to the Fund, the Funds investors would lose all of their money. The Funds investment adviser, Rafferty Asset Management, LLC (Rafferty or Adviser), will attempt to position each Funds portfolio to ensure that a Fund does not lose more than 90% of its net asset value on a given trading day. The cost of such downside protection will be limitations on a Funds gains. As a consequence, a Funds portfolio may not be responsive to benchmark movements beyond 33% on a given trading day in a direction favorable to the Fund. For example, if a 3X Bull Funds underlying benchmark was to gain 35%, that Fund might be limited to a daily gain of 90%, which corresponds to 300% of a benchmark gain of 30%, rather than 300% of a benchmark gain of 35%.
The Securities and Exchange Commission has not approved or disapproved these securities or passed upon the adequacy of this prospectus. Any representation to the contrary is a criminal offense.
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ADDITIONAL INFORMATION REGARDING INVESTMENT TECHNIQUES AND POLICIES |
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Back Cover |
Direxion Daily Chile Bull 3X Shares
Important Information Regarding the Fund
The Direxion Daily Chile Bull 3X Shares (Fund) seeks daily leveraged investment results. The pursuit of daily leveraged goals means that the Fund is riskier than alternatives that do not use leverage because the Funds objective is to magnify the performance of an index. The pursuit of daily leveraged investment goals means that the return of the Fund for a period longer than a full trading day may bear no resemblance to 300% of the return of its index for such longer period because the aggregate return of the Fund is the product of the series of daily leveraged returns for each trading day. The path of the benchmark during the longer period may be at least as important to the Funds return for the longer period as the cumulative return of the benchmark for the relevant longer period, especially in periods of market volatility. Further, the return for investors that invest for periods less than a full trading day or for a period different than a trading day will not be the product of the return of the Funds stated goal and the performance of the target index for the full trading day.
Investment Objective
The Fund seeks daily investment results, before fees and expenses, of 300% of the performance of the MSCI Chile IMI 25/50 Index. The Fund seeks daily leveraged investment results and does not seek to achieve its stated investment objective over a period of time greater than one day. The Fund is different and much riskier than most exchange-traded funds.
The Fund is designed to be utilized only by knowledgeable investors who understand the potential consequences of seeking daily leveraged investment results, understand the risks associated with the use of leverage and are willing to monitor their portfolios frequently. The Fund seeks daily leveraged investment results relative to the Index and is different and riskier than similarly benchmarked exchange-traded funds that do not use leverage. Therefore, the Fund is not intended to be used by, and is not appropriate for, investors who do not intend to actively monitor and manage their portfolios.
Fees and Expenses of the Fund
This table describes the fees and expenses that you may pay if you buy or hold shares of the Fund (Shares). Investors purchasing shares in the secondary market may pay costs (including customary brokerage commissions) charged by their broker.
A nnual Fund Operating Expenses (1 ) (expenses that you pay each year as a percentage of the value of your investment)
Management Fees |
0.75% | |||
Distribution and/or Service (12b-1) Fees |
0.00% | |||
Other Expenses of the Fund |
0.25% | |||
Acquired Fund Fees and Expenses |
0.15% | |||
|
|
|||
Total Annual Fund Operating Expenses |
1.15% | |||
Expense Cap/Reimbursement |
(0.05% | ) | ||
|
|
|||
Total Annual Fund Operating Expenses After Expense Cap/Reimbursement |
1.10% | |||
|
|
(1) |
The Funds adviser, Rafferty Asset Management, LLC (Rafferty or the Adviser) has contractually agreed to cap all or a portion of its management fee and/or reimburse the Fund for Other Expenses through March 1, 2015, to the extent that the Funds Total Annual Operating Expenses exceed 0.95% (excluding, as applicable, among other expenses, taxes, leverage interest, Acquired Fund Fees and Expenses, dividends or interest on short positions, other interest expenses, brokerage commissions, expenses incurred in connection with any merger or reorganization and extraordinary expenses such as litigation). Any expense cap is subject to reimbursement by the Fund within the following three years only if overall expenses fall below these percentage limitations. This agreement may be terminated or revised at any time with the consent of the Board of Trustees. |
Expense Example
This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund for the time periods indicated and then redeem all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Funds operating expenses remain the same. Although your actual costs may be higher or lower, based on these assumptions your costs would be:
1 Year | 3 Years | |
|
||
$112 | $360 |
Portfolio Turnover
The Fund pays transaction costs, such as commissions, when it buys and sells securities (or turns over its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in a taxable account. These costs, which are not reflected in Annual Fund Operating Expenses or in the example, affect the Funds performance.
DIREXION SHARES ETF TRUST PROSPECTUS | 1 |
Principal Investment Strategies
The Fund, under normal circumstances, creates long positions by investing at least 80% of its assets in the securities that comprise the MSCI Chile IMI 25/50 Index (Index) and/or financial instruments that provide leveraged and unleveraged exposure to the Index. These financial instruments include: futures contracts; options on securities, indices and futures contracts; equity caps, floors and collars; swap agreements; forward contracts; short positions; reverse repurchase agreements; exchange-traded funds (ETFs); and other financial instruments. On a day-to-day basis, the Fund also may hold short-term debt instruments that have terms-to-maturity of less than 397 days and exhibit high quality credit profiles, including U.S. government securities and repurchase agreements.
Chile is considered an emerging market, as that term is defined by the index provider. The determination that Chile is an emerging market is based on it being an economy that is in the initial stages of industrialization and has been historically marked by low per capita income and lack of capital market transparency, but appears to be implementing political and/or market reforms resulting in greater capital market transparency, increased access for foreign investors and generally improved economic conditions. Emerging markets have the potential for significantly higher or lower rates of return and carry greater risks than more developed economies.
The Index is designed to measure the performance of the large, mid and small cap segments of the Chilean equity market, covering approximately 99% of the free float-adjusted market capitalization in Chile. As of the date of its last reconstitution, the Index had a total dollar value of approximately $77.5 billion, composed of 43 constituent securities ranging in market capitalization from approximately $250.9 million to $6.9 billion.
The Index applies certain screens and weightings to take into account the investment limits placed on regulated investment companies (RICs) under federal tax regulations. One such requirement is that at the end of each quarter of a RICs tax year, no more than 25% of its assets may be invested in a single issuer and the sum of the weights of all issuers representing more than 5% of the RIC should not exceed 50% of its total assets. The Index aims to reflect these requirements in the selection and weighting of its component securities.
The Fund may gain exposure to only a representative sample of the securities in the Index that have aggregate characteristics similar to those of the Index. The Fund gains this exposure either by directly investing in the underlying securities of the Index or by investing in derivatives that provide exposure to those securities. The Fund seeks to remain fully invested at all times consistent with its stated goal. At the close of the markets each trading day, Rafferty positions the Funds portfolio so that its exposure to the Index is consistent with the Funds investment objective. The impact of the Indexs movements during the day will affect whether the Funds portfolio needs to be re-positioned. For example, if the Index has risen on a given day, net assets of the Fund should rise, meaning that the Funds exposure will need to be increased. Conversely, if the Index has fallen on a given day, net assets of the Fund should fall, meaning the Funds exposure will need to be reduced. This re-positioning strategy typically results in high portfolio turnover.
Because of daily rebalancing and the compounding of each days return over time, the return of the Fund for periods longer than a single day will be the result of each days returns compounded over the period, which will very likely differ from 300% of the return of the Index over the same period. The Fund will lose money if the Index performance is flat over time, and as a result of daily rebalancing, the Indexs volatility and the effects of compounding, it is even possible that the Fund will lose money over time while the Indexs performance increases.
Additionally, because a significant portion of the assets of the Fund may come from investors using asset allocation and market timing investment strategies, the Fund may further need to engage in frequent trading. The Fund will concentrate its investment in a particular industry or group of industries to approximately the same extent as the Index is so concentrated.
Principal Risks
An investment in the Fund entails risk. The Fund could lose money or its performance could trail that of other investment alternatives. The Adviser cannot guarantee that the Fund will achieve its objective. In addition, the Fund presents some risks not traditionally associated with most mutual funds and exchange-traded funds. It is important that investors closely review all of the risks listed below and understand how these risks interrelate before making an investment in the Fund. Turbulence in financial markets and reduced liquidity in equity, credit and fixed income markets could negatively affect issuers worldwide, including the Fund. There is the risk that you could lose all or a portion of your money invested in the Fund.
Adverse Market Conditions Risk
Because the Fund magnifies the performance of the Index, its performance will suffer during conditions in which the Index declines.
Advisers Investment Strategy Risk
The Adviser utilizes a quantitative methodology to select investments for the Fund. Although this methodology is designed to correlate the Funds performance with the
2 | DIREXION SHARES ETF TRUST PROSPECTUS |
performance of the Index, there is no assurance that such methodology will be successful and will enable the Fund to achieve its investment objective.
Chilean Securities Risk
Investment in securities of Chilean issuers involves risks that may be greater than if the Funds investments were more geographically diverse. Chiles economy is heavily dependent on trading with key partners. Any increases or decreases in the volume of this trading, changes in taxes or tariffs, or variance in political relationships between nations may impact the Chilean economy overall in a way that would be adverse to the Funds investments. Additionally, investment in Chile may be subject to any positive or adverse effects of the varying nature of its economic landscape with respect to expropriation and/or nationalization of assets, strengthened or lessened restrictions on and government intervention in international trade, confiscatory taxation, political instability, including authoritarian and/or military involvement in governmental decision making, armed conflict, the impact on the economy as a result of civil war and social instability as a result of religious, ethnic and/or socioeconomic unrest.
Counterparty Risk
The Fund may invest in financial instruments involving counterparties for the purpose of attempting to gain exposure to a particular group of securities or an asset class without actually purchasing those securities or investments, or to hedge a position. These financial instruments may include swap agreements. The use of swap agreements and other counterparty instruments involves risks that are different from those associated with ordinary portfolio securities transactions. For example, the Fund bears the risk of loss of the amount expected to be received under a swap agreement in the event of the default or bankruptcy of a swap agreement counterparty. Swap agreements and other counterparty instruments also may be considered to be illiquid. In addition, the Fund may enter into swap agreements that involve a limited number of counterparties, which may increase the Funds exposure to counterparty credit risk. The Fund does not specifically limit its counterparty risk with respect to any single counterparty. Further, there is a risk that no suitable counterparties will be willing to enter into, or continue to enter into, transactions with the Fund and, as a result, the Fund may not be able to achieve its investment objective.
Currency Exchange Rate Risk
Changes in foreign currency exchange rates will affect the value of what the Fund owns and the Funds share price. Generally, when the U.S. dollar rises in value against a foreign currency, an investment in that country loses value because that currency is worth fewer U.S. dollars. Devaluation of a currency by a countrys government or banking authority also will have a significant impact on the value of any investments denominated in that currency. Currency markets generally are not as regulated as securities markets.
Daily Correlation Risk
There is no guarantee that the Fund will achieve a high degree of correlation to the Index and therefore achieve its daily investment objective. To achieve a high degree of correlation with the Index, the Fund seeks to rebalance its portfolio daily to keep leverage consistent with its daily target. The Fund may have difficulty achieving its daily target due to fees and expenses, high portfolio turnover, transaction costs and costs associated with the use of leveraged investment techniques and/or a temporary lack of liquidity in the markets for the securities held by the Fund. Market disruptions, regulatory restrictions or extreme volatility will also adversely affect the Funds ability to adjust exposure to the required levels. The Fund may not have investment exposure to all securities in its underlying Index, or its weighting of investment exposure to such stocks or industries may be different from that of the Index. In addition, the Fund may invest in securities or financial instruments not included in the underlying Index. The Fund may be subject to large movements of assets into and out of the Fund, potentially resulting in the Fund being over- or under-exposed to its Index. In addition, the target amount of portfolio exposure to the Index is impacted dynamically by the Indexs movement. Because of this, it is unlikely that the Fund will be perfectly exposed to the Index at the end of each day. The possibility of the Fund being materially over- or under-exposed to its Index increases on days when the Index is volatile near the close of the trading day. Activities surrounding annual index reconstitutions and other index rebalancing or reconstitution events may hinder the Funds ability to meet its daily investment objective on that day.
Depositary Receipt Risk
To the extent the Fund seeks exposure to foreign companies, the Funds investments may be in the form of depositary receipts or other securities convertible into securities of foreign issuers, including American Depositary Receipts (ADRs), European Depositary Receipts (EDRs), and Global Depositary Receipts (GDRs). While the use of ADRs, EDRs and GDRs, which are traded on exchanges and represent and ownership in a foreign security, provide an alternative to directly purchasing the underlying foreign securities in their respective national markets and currencies, investments in ADRs, EDRs, and GDRs continue to be subject to certain of the risks associated with investing directly in foreign securities.
DIREXION SHARES ETF TRUST PROSPECTUS | 3 |
Derivatives Risk
The Fund uses investment techniques, including investments in derivatives such as futures and forward contracts, options and swaps, which may be considered aggressive. Investments in such derivatives are subject to market risks that may cause their prices to fluctuate over time and may increase the volatility of the Fund. The use of derivatives may expose the Fund to additional risks that it would not be subject to if it invested directly in the securities underlying those derivatives, such as counterparty risk and the risk that the derivatives may become illiquid. The use of derivatives may result in larger losses or smaller gains than otherwise would be the case. Additionally, with respect to the use of swap agreements, if the Index has a dramatic intraday move in value that causes a material decline in the Funds net asset value (NAV), the terms of the swap agreement between the Fund and its counterparty may allow the counterparty to immediately close out of the transaction with the Fund. In such circumstances, the Fund may be unable to enter into another swap agreement or invest in other derivatives to achieve the desired exposure consistent with the Funds daily investment objective. This may prevent the Fund from achieving its daily investment objective particularly if the Index reverses all or a portion of its intraday move by the end of the day. In addition, the Funds investments in derivatives, as of the date of this Prospectus, are subject to the following risks:
Futures and Forward Contracts . There may be an imperfect correlation between the changes in market value of the securities held by the Fund and the prices of futures contracts. There may not be a liquid secondary market for the futures contracts. Forward currency transactions include the risks associated with fluctuations in currency.
Options . There may be an imperfect correlation between the prices of options and movements in the price of the securities (or indices) hedged or used for cover, which may cause a given hedge not to achieve its objective.
Swap Agreements . Interest rate swaps are subject to interest rate and credit risk. Total return swaps are subject to counterparty risk, which relates to credit risk of the counterparty and liquidity risk of the swaps themselves.
Early Close/Trading Halt Risk
An exchange or market may close or issue trading halts on specific securities, or the ability to buy or sell certain securities or financial instruments may be restricted, which may result in the Fund being unable to buy or sell certain securities or financial instruments. In such circumstances, the Fund may be unable to rebalance its portfolio, may be unable to accurately price its investments and/or may incur substantial trading losses.
Effects of Compounding and Market Volatility Risk
The Fund does not attempt to, and should not be expected to, provide returns which are a multiple of the return of the Index for periods other than a single day. The Fund rebalances its portfolio on a daily basis, increasing exposure in response to that days gains or reducing exposure in response to that days losses. This means that for a period longer than one day, the pursuit of daily goals may result in daily leveraged compounding. It also means that the return of an index over a period of time greater than one day multiplied by the Funds daily target (300%) generally will not equal the Funds performance over that same period.
As a result, over time, the cumulative percentage increase or decrease in the value of the Funds portfolio may diverge significantly from the cumulative percentage increase or decrease in the multiple of the return of the Funds underlying index due to the compounding effect of losses and gains on the returns of the Fund. It also is expected that the Funds use of leverage will cause the Fund to underperform the return of three times its benchmark in a trendless or flat market.
The effect of compounding becomes more pronounced on the Funds performance as the Index experiences volatility. The Indexs volatility rate is a statistical measure of the magnitude of fluctuations in the returns of the Index. The table below provides examples of how Index volatility could affect the Funds performance. The chart shows estimated Fund returns for a number of combinations of performance and volatility over a one-year period and is shown to illustrate how holding the Fund for a period longer than one day may negatively impact investment return. As shown below, this Fund, or any other 3X Bull Fund, would be expected to lose 17.1% (as shown in Table 1 below) if its Index provided no return over a one year period during which the Index experienced annualized volatility of 25%. If the Indexs annualized volatility were to rise to 75%, the hypothetical loss for a one year period for the Fund widens to approximately 81.5%.
At higher ranges of volatility, there is a chance of a near complete loss of value even if the Index is flat. For instance, if the Indexs annualized volatility is 100%, the Fund would be expected to lose 95% of its value, even if the cumulative Index return for the year was only 0%.
4 | DIREXION SHARES ETF TRUST PROSPECTUS |
Table 1
One
Year Index Return |
300%
One Year Index Return |
Volatility Rate | ||||||||||||||||||||||||
10% | 25% | 50% | 75% | 100% | ||||||||||||||||||||||
60% | 180% | 93.8% | 94.7% | 97.0% | 98.8% | 99.7% | ||||||||||||||||||||
50% | 150% | 87.9% | 89.6% | 94.1% | 97.7% | 99.4% | ||||||||||||||||||||
40% | 120% | 79.0% | 82.1% | 89.8% | 96.0% | 98.9% | ||||||||||||||||||||
30% | 90% | 66.7% | 71.6% | 83.8% | 93.7% | 98.3% | ||||||||||||||||||||
20% | 60% | 50.3% | 57.6% | 75.8% | 90.5% | 97.5% | ||||||||||||||||||||
10% | 30% | 29.3% | 39.6% | 65.6% | 86.5% | 96.4% | ||||||||||||||||||||
0% | 0% | 3.0% | 17.1% | 52.8% | 81.5% | 95.0% | ||||||||||||||||||||
10% | 30% | 29.2% | 10.3% | 37.1% | 75.4% | 93.4% | ||||||||||||||||||||
20% | 60% | 67.7% | 43.3% | 18.4% | 68.0% | 91.4% | ||||||||||||||||||||
30% | 90% | 113.2% | 82.1% | 3.8% | 59.4% | 89.1% | ||||||||||||||||||||
40% | 120% | 166.3% | 127.5% | 29.6% | 49.2% | 86.3% | ||||||||||||||||||||
50% | 150% | 227.5% | 179.8% | 59.4% | 37.6% | 83.2% | ||||||||||||||||||||
60% | 180% | 297.5% | 239.6% | 93.5% | 24.2% | 79.6% |
The Indexs annualized historical volatility rate for the period from May 30, 2008 through May 31, 2013 is 25.33%. The Indexs highest volatility rate for any one calendar year during the five-year period is 40.95% and volatility for a shorter period of time may have been substantially higher. The Indexs annualized performance for the five-year period from May 30, 2008 through May 31, 2013 is 5.82%. Historical Index volatility and performance are not indications of what the Index volatility and performance will be in the future.
For additional graphs and charts demonstrating the effects of volatility and index performance on the long-term performance of the Fund, see Additional Information Regarding Investment Techniques and Policies and Negative Implications of Daily Goals in Volatile Markets in the Funds statutory prospectus, and Special Note Regarding the Correlation Risks of the Funds in the Funds Statement of Additional Information.
Holding an unmanaged position opens the investor to the risk of market volatility adversely affecting the performance of the investment. The Fund is not appropriate for investors who do not intend to actively monitor and manage their portfolios. This table is intended to underscore the fact that the Fund is designed as a short-term trading vehicle for investors who intend to actively monitor and manage their portfolios.
To fully understand the risks of market volatility on the Fund, see Negative Implications of Daily Goals in Volatile Markets found in the statutory prospectus.
Emerging Markets Risk
Indirectly investing in emerging markets instruments involve greater risks than indirectly investing in foreign instruments in general. Risks of investing in emerging market countries include: political or social upheaval; nationalization of businesses; restrictions on foreign ownership; prohibitions on the repatriation of assets; and risks from an economys dependence on revenues from particular commodities or industries. In addition, currency transfer restrictions, limited potential buyers for such instruments, delays and disruption in settlement procedures and illiquidity or low volumes of transactions may make exits difficult or impossible at times.
Equity Securities Risk
Investments in publicly issued equity securities and securities that provide exposure to equity securities, including common stocks, in general are subject to market risks that may cause their prices to fluctuate over time. Fluctuations in the value of equity securities in which the Fund invests will cause the NAV of the Fund to fluctuate.
Foreign Securities Risk
Indirectly investing in foreign instruments may involve greater risks than investing in domestic instruments. As a result, the Funds returns and NAVs may be affected to a large degree by fluctuations in currency exchange rates, interest rates, political, diplomatic or economic conditions and regulatory requirements in other countries. The laws and accounting, auditing, and financial reporting standards in foreign countries typically are not as strict as they are in the U.S., and there may be less public information available about foreign companies.
Gain Limitation Risk
If the Funds benchmark moves more than 33% on a given trading day in a direction adverse to the Fund, you would lose all of your money. Rafferty will attempt to position the Funds portfolio to ensure that the Fund does not lose more than 90% of its NAV on a given day. The cost of such downside protection will be limitations on the Funds gains. As a consequence, the Funds portfolio may not be responsive to Index gains beyond 30% in a given day. For example, if the Index were to gain 35%, the Fund might be limited to a daily gain of 90% rather than 105%, which is 300% of the Index gain of 35%.
Geographic Concentration Risk
Investments in a particular country or geographic region may be particularly susceptible to political, diplomatic or economic conditions and regulatory requirements. As a result, the Fund may be more volatile than a more geographically diversified fund.
DIREXION SHARES ETF TRUST PROSPECTUS | 5 |
High Portfolio Turnover Risk
Daily rebalancing of the Funds holdings pursuant to its daily investment objective causes a much greater number of portfolio transactions when compared to most exchange-traded funds. Such frequent and active trading leads to significantly higher transaction costs because of increased broker commissions resulting from such transactions. In addition, there is the possibility of significantly increased capital gains, including short-term and/or long-term capital gains that will be taxable to shareholders as ordinary income. The Fund calculates portfolio turnover without including the short term cash instruments or derivative transactions that comprise the majority of the Funds trading. As such, if the Funds extensive use of derivative instruments were reflected, the calculated portfolio turnover rate would be significantly higher.
Intra-Day Investment Risk
The Fund seeks leveraged investment results from the close of the market on a given trading day until the close of the market on the subsequent trading day. The exact exposure of an investment in the Fund intraday in the secondary market is a function of the difference between the value of the Index at the market close on the first trading day and the value of the Index at the time of purchase. If the Index gains value, the Funds net assets will rise by the same amount as the Funds exposure. Conversely, if the Index declines, the Funds net assets will decline by the same amount as the Funds exposure. Since a Fund starts each trading day with exposure which is 300% of its net assets, a change in both the exposure and the net assets of the Fund by the same absolute amount results in a change in the comparative relationship of the two. As an example (using simplified numbers), if the Fund had $100 in net assets at the market close, it would seek $300 of exposure to the next trading days Index performance. If the Index rose by 1% by noon the following trading day, the exposure of the Fund will have risen by 1% to $303 and the net assets will have risen by that $3 gain to $103. With net assets of $103 and exposure of $303, a purchaser at that point would be receiving 294% exposure of her investment instead of 300%.
Leverage Risk
If you invest in the Fund, you are exposed to the risk that a decline in the daily performance of the Index will be leveraged. This means that your investment in the Fund will be reduced by an amount equal to 3% for every 1% daily decline, not including the cost of financing the portfolio and the impact of operating expenses, which would further lower your investment. The Fund could theoretically lose an amount greater than its net assets in the event of an Index decline of more than 33%. Further, purchasing shares during a day may result in greater than 300% exposure to the performance of the Index if the Index declines between the close of the markets on one trading day and before the close of the markets on the next trading day.
To fully understand the risks of using leverage in the Fund, see Effects of Compounding and Market Volatility Risk above.
Liquidity Risk
Some securities held by the Fund, including derivatives, may be difficult to sell or illiquid, particularly during times of market turmoil. Illiquid securities also may be difficult to value. If the Fund is forced to sell an illiquid security at an unfavorable time or at a price that is lower than Raffertys judgment of the securitys true market value, the Fund may be forced to sell the security at a loss. Such a situation may prevent the Fund from limiting losses, realizing gains or achieving a high correlation with the Index.
Market Risk
The Fund is subject to market risks that can affect the value of its shares. These risks include political, regulatory, market and economic developments, including developments that impact specific economic sectors, industries or segments of the market.
Market Timing Risk
Rafferty expects a significant portion of the assets of the Fund to come from professional money managers and investors who use the Funds as part of asset allocation and market timing investment strategies. These strategies often call for frequent trading which may lead to increased portfolio turnover, higher transaction costs, and the possibility of increased capital gains, including short-term and/or long-term capital gain that will be taxable to shareholders as ordinary income.
Non-Diversification Risk
The Fund is non-diversified, which means it invests a high percentage of its assets in a limited number of securities. A non-diversified funds NAV and total return may fluctuate more or fall greater in times of weaker markets than a conventional diversified fund.
Regulatory Risk
The Fund is subject to the risk that a change in U.S. law and related regulations will impact the way the Fund operates, increase the particular costs of the Funds operations and/or change the competitive landscape.
6 | DIREXION SHARES ETF TRUST PROSPECTUS |
Risks of Investing in Other Investment Companies (including ETFs)
Investments in the securities of other investment companies, including ETFs, may involve duplication of advisory fees and certain other expenses. Fund shareholders indirectly bear the Funds proportionate share of the fees and expenses indirectly paid by shareholders of the other investment company or ETF, in addition to the fees and expenses Fund shareholders bear in connection with the Funds own operations. The Funds performance may be magnified positively or negatively by virtue of its investment in other investment companies. If the investment company or ETF fails to achieve its investment objective, the value of the Funds investment will decline, adversely affecting the Funds performance. In addition, closed end investment company and ETF shares potentially may trade at a discount or a premium and are subject to brokerage and other trading costs, which could result in greater expenses to the Fund. Finally, because the value of ETF shares depends on the demand in the market, the Adviser may not be able to liquidate the Funds holdings in those shares at the most optimal time, adversely affecting the Funds performance.
Small and Mid Capitalization Company Risk
Investing in the securities of small and/or mid capitalization companies, and securities that provide exposure to small and/or mid capitalization companies, involves greater risks and the possibility of greater price volatility than investing in more-established, larger capitalization companies. Small and mid capitalization companies often have narrower markets for their goods and/or services and more limited managerial and financial resources than larger, more established companies. Furthermore, those companies often have limited product lines, services, markets, financial resources or are dependent on a small management group. In addition, because these stocks are not well-known to the investing public, do not have significant institutional ownership and are followed by relatively few security analysts, there will normally be less publicly available information concerning these securities compared to what is available for the securities of larger companies. Adverse publicity and investor perceptions, whether based on fundamental analysis, can decrease the value and liquidity of securities held by the Fund. As a result, their performance can be more volatile and they face greater risk of business failure, which could increase the volatility of the Funds portfolio.
Tax and Distribution Risk
The Fund has extremely high portfolio turnover which causes the Fund to generate significant amounts of taxable income. This income is typically short-term capital gain, which is generally treated as ordinary income when distributed to shareholders, or short-term capital loss. The Fund rarely generates long-term capital gain or loss. The Fund will generally need to distribute net short-term capital gain to satisfy certain tax requirements. As a result of the Funds high portfolio turnover, the Fund could make larger and/or more frequent distributions than traditional unleveraged ETFs. Because the Funds asset level changes frequently, these distributions could comprise a substantial portion or even all of the Funds net assets if the Fund distributes this income after a decline in its net assets. In addition, the Fund may be held by short-term investors and these investors may exit the Fund prior to the record date of a distribution. As a result, shareholders in the Fund on the day of a distribution may receive substantial distributions, which could lead to negative tax implications for such shareholders. Potential investors are urged to consult their own tax advisers for more detailed information.
Rules governing the federal income tax aspects of certain derivatives, including total return equity swaps, real estate-related swaps, credit default swaps and other credit derivatives are not entirely clear. Because the Funds status as a regulated investment company might be affected if the Internal Revenue Service did not accept the Funds treatment of certain transactions involving derivatives, the Funds ability to engage in these transactions may be limited.
Tracking Error Risk
The Fund may have difficulty achieving its daily target due to fees and expenses, high portfolio turnover, transaction costs, and/or a temporary lack of liquidity in the markets for the securities held by the Fund. A failure to achieve a daily target may cause the Fund to provide returns for a longer period that are worse than expected. In addition, even though the Fund may meet its daily target for a period of time, this will not necessarily produce the returns that might be expected in light of the returns of the Index or the Funds benchmark for that period.
Valuation Time Risk
The Fund values its portfolio as of the close of regular trading on the New York Stock Exchange (NYSE) (generally 4:00 P.M. Eastern time). In some cases, foreign market indices close before the NYSE opens or may not be open for business on the same calendar days as the Fund. As a result, the daily performance of the Fund can vary from the performance of the Index.
Special Risks of Exchange-Traded Funds
Not Individually Redeemable. Shares are not individually redeemable and may be redeemed by the Fund at NAV only in large blocks known as Creation Units. You may incur brokerage costs purchasing enough Shares to constitute a Creation Unit.
DIREXION SHARES ETF TRUST PROSPECTUS | 7 |
Trading Issues. Trading in Shares on an exchange may be halted due to market conditions or for reasons that, in the view of that exchange, make trading in Shares inadvisable, such as extraordinary market volatility or other reasons. There can be no assurance that Shares will continue to meet the listing requirements of the exchange on which it trades, and the listing requirements may be amended from time to time.
Market Price Variance Risk. Individual Shares of the Fund that are listed for trading on an exchange can be bought and sold in the secondary market at market prices. The market prices of Shares will fluctuate in response to changes in NAV and supply and demand for Shares. The Adviser cannot predict whether Shares will trade above, below or at their NAV. Differences between secondary market prices and NAV for Shares may be due largely to supply and demand forces in the secondary market, which forces may not be the same as those influencing prices for securities or instruments held by the Fund at a particular time. Given the fact that Shares can be created and redeemed in Creation Units, the Adviser believes that large discounts or premiums to the NAV of Shares should not be sustained. There may, however, be times when the market price and the NAV vary significantly and you may pay more than NAV when buying Shares on the secondary market, and you may receive less than NAV when you sell those Shares. The market price of Shares, like the price of any exchange-traded security, includes a bid-ask spread charged by the exchange specialists, market makers or other participants that trade the particular security. In times of severe market disruption, the bid-ask spread often increases significantly. This means that Shares may trade at a discount to NAV and the discount is likely to be greatest when the price of Shares is falling fastest, which may be the time that you most want to sell your Shares. The Funds investment results are measured based upon the daily NAV of the Fund over a period of time. Investors purchasing and selling Shares in the secondary market may not experience investment results consistent with those experienced by those creating and redeeming directly with the Fund. There is no guarantee that an active secondary market will develop for Shares of the Fund.
Fund Performance
The Fund has not yet commenced operations; therefore, performance information is not yet available. In the future, performance information for the Fund will be presented in this section. Performance information also will be available on the Funds website at http://www.direxionfunds.com/products?presets=etfs&activetab=performance or by calling the Fund toll free at 1-866-476-7523.
Management
Investment Adviser
Rafferty Asset Management, LLC is the Funds investment adviser.
Portfolio Manager
Paul Brigandi, the Funds Portfolio Manager, is primarily responsible for the day-to-day management of the Fund and has served in this role since the Funds inception.
Purchase and Sale of Fund Shares
The Fund will issue and redeem Shares only to Authorized Participants (typically, broker-dealers) in exchange for the deposit or delivery of a basket of assets (securities and/or cash) in large blocks, known as Creation Units, each of which is comprised of 50,000 Shares. Retail investors may only purchase and sell Fund Shares on a national securities exchange through a broker-dealer. Because the Shares trade at market prices rather than NAV, Shares may trade at a price greater than NAV (premium) or less than NAV (discount).
Tax Information
The Fund intends to make distributions that may be taxed as ordinary income or long-term capital gains. Those distributions will be subject to federal income taxes and may also be subject to state and local taxes. Distributions by the Fund may be significantly higher than those of most exchange-traded funds.
Payments to Broker-Dealers and Other Financial Intermediaries
If you purchase the Fund through a broker-dealer or other financial intermediary (such as a bank or financial advisor), the Fund and/or the Adviser may pay the intermediary for the sale of Fund shares and related services. These payments may create a conflict of interest by influencing the broker-dealer or other financial intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your financial intermediarys website for more information.
8 | DIREXION SHARES ETF TRUST PROSPECTUS |
Direxion Daily Chile Bear 3X Shares
Important Information Regarding the Fund
The Direxion Daily Chile Bear 3X Shares (Fund) seeks daily leveraged investment results. The pursuit of daily leveraged goals means that the Fund is riskier than alternatives that do not use leverage because the Funds objective is to magnify the performance of an index. The pursuit of daily leveraged investment goals means that the return of the Fund for a period longer than a full trading day may bear no resemblance to 300% of the return of its index for such longer period because the aggregate return of the Fund is the product of the series of daily leveraged returns for each trading day. The path of the benchmark during the longer period may be at least as important to the Funds return for the longer period as the cumulative return of the benchmark for the relevant longer period, especially in periods of market volatility. Further, the return for investors that invest for periods less than a full trading day or for a period different than a trading day will not be the product of the return of the Funds stated goal and the performance of the target index for the full trading day.
Investment Objective
The Fund seeks daily investment results, before fees and expenses, of 300% of the inverse (or opposite) of the performance of the MSCI Chile IMI 25/50 Index. The Fund seeks daily leveraged investment results and does not seek to achieve its stated investment objective over a period of time greater than one day. The Fund is different and much riskier than most exchange-traded funds.
The Fund is designed to be utilized only by knowledgeable investors who understand the potential consequences of seeking daily leveraged investment results, understand the risks associated with shorting and the use of leverage, and are willing to monitor their portfolios frequently. The Fund seeks daily leveraged investment results relative to the Index and is different and riskier than similarly benchmarked exchange-traded funds that do not use leverage. Therefore, the Fund is not intended to be used by, and is not appropriate for, investors who do not intend to actively monitor and manage their portfolios.
Fees and Expenses of the Fund
This table describes the fees and expenses that you may pay if you buy or hold shares of the Fund (Shares). Investors purchasing shares in the secondary market may pay costs (including customary brokerage commissions) charged by their broker.
Annual Fund Operating Expenses (1) (expenses that you pay each year as a percentage of the value of your investment)
Management Fees |
0.75% | |||
Distribution and/or Service (12b-1) Fees |
0.00% | |||
Other Expenses of the Fund |
0.25% | |||
Acquired Fund Fees and Expenses |
0.15% | |||
|
|
|||
Total Annual Fund Operating Expenses |
1.15% | |||
Expense Cap/Reimbursement |
(0.05% | ) | ||
|
|
|||
Total Annual Fund Operating Expenses After Expense Cap/Reimbursement |
1.10% | |||
|
|
(1) |
The Funds adviser, Rafferty Asset Management, LLC (Rafferty or the Adviser) has contractually agreed to cap all or a portion of its management fee and/or reimburse the Fund for Other Expenses through March 1, 2015, to the extent that the Funds Total Annual Operating Expenses exceed 0.95% (excluding, as applicable, among other expenses, taxes, leverage interest, Acquired Fund Fees and Expenses, dividends or interest on short positions, other interest expenses, brokerage commissions, expenses incurred in connection with any merger or reorganization and extraordinary expenses such as litigation). Any expense cap is subject to reimbursement by the Fund within the following three years only if overall expenses fall below these percentage limitations. This agreement may be terminated or revised at any time with the consent of the Board of Trustees. |
Expense Example
This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund for the time periods indicated and then redeem all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Funds operating expenses remain the same. Although your actual costs may be higher or lower, based on these assumptions your costs would be:
1 Year | 3 Years | |
|
||
$112 | $360 |
Portfolio Turnover
The Fund pays transaction costs, such as commissions, when it buys and sells securities (or turns over its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in a taxable account. These costs, which are not reflected in Annual Fund Operating Expenses or in the example, affect the Funds performance.
Principal Investment Strategies
The Fund, under normal circumstances, creates short positions by investing at least 80% of its assets in: futures
DIREXION SHARES ETF TRUST PROSPECTUS | 9 |
contracts; options on securities, indices and futures contracts; equity caps, floors and collars; swap agreements; forward contracts; short positions; reverse repurchase agreements; exchange-traded funds (ETFs); and other financial instruments that, in combination, provide leveraged and unleveraged exposure to the MSCI Chile IMI 25/50 Index (Index). The Fund invests the remainder of its assets in short-term debt instruments that have terms-to-maturity of less than 397 days and exhibit high quality credit profiles, including U.S. government securities and repurchase agreements. The Fund does not invest in equity securities.
Chile is considered an emerging market, as that term is defined by the index provider. The determination that Chile is an emerging market is based on it being an economy that is in the initial stages of industrialization and has been historically marked by low per capita income and lack of capital market transparency, but appears to be implementing political and/or market reforms resulting in greater capital market transparency, increased access for foreign investors and generally improved economic conditions. Emerging markets have the potential for significantly higher or lower rates of return and carry greater risks than more developed economies.
The Index is designed to measure the performance of the large, mid and small cap segments of the Chilean equity market, covering approximately 99% of the free float-adjusted market capitalization in Chile. As of the date of its last reconstitution, the Index had a total dollar value of approximately $77.5 billion, composed of 43 constituent securities ranging in market capitalization from approximately $250.9 million to $6.9 billion.
The Index applies certain screens and weightings to take into account the investment limits placed on regulated investment companies (RICs) under federal tax regulations. One such requirement is that at the end of each quarter of a RICs tax year, no more than 25% of its assets may be invested in a single issuer and the sum of the weights of all issuers representing more than 5% of the RIC should not exceed 50% of its total assets. The Index aims to reflect these requirements in the selection and weighting of its component securities.
The Fund may gain exposure to only a representative sample of the securities in the Index that have aggregate characteristics similar to those of the Index. The Fund gains this exposure by investing in a combination of financial instruments that, in combination, provide exposure to the underlying securities of the Index. The Fund seeks to remain fully invested at all times consistent with its stated goal. At the close of the markets each trading day, Rafferty positions the Funds portfolio so that its exposure to the Index is consistent with the Funds investment objective. The impact of the Indexs movements during the day will affect whether the Funds portfolio needs to be re-positioned. For example, if the Index has fallen on a given day, net assets of the Fund should rise, meaning that the Funds exposure will need to be increased. Conversely, if the Index has risen on a given day, net assets of the Fund should fall, meaning the Funds exposure will need to be reduced. This re-positioning strategy typically results in high portfolio turnover.
Because of daily rebalancing and the compounding of each days return over time, the return of the Fund for periods longer than a single day will be the result of each days returns compounded over the period, which will very likely differ from 300% of the return of the Index over the same period. The Fund will lose money if the Index performance is flat over time, and as a result of daily rebalancing, the Indexs volatility and the effects of compounding, it is even possible that the Fund will lose money over time while the Indexs performance decreases.
Additionally, because a significant portion of the assets of the Fund may come from investors using asset allocation and market timing investment strategies, the Fund may further need to engage in frequent trading. The Fund will concentrate its investment in a particular industry or group of industries to approximately the same extent as the Index is so concentrated.
Principal Risks
An investment in the Fund entails risk. The Fund could lose money or its performance could trail that of other investment alternatives. The Adviser cannot guarantee that the Fund will achieve its objective. In addition, the Fund presents some risks not traditionally associated with most mutual funds and exchange-traded funds. It is important that investors closely review all of the risks listed below and understand how these risks interrelate before making an investment in the Fund. Turbulence in financial markets and reduced liquidity in equity, credit and fixed income markets could negatively affect issuers worldwide, including the Fund. There is the risk that you could lose all or a portion of your money invested in the Fund.
Adverse Market Conditions Risk
Because the Fund magnifies the inverse performance of the Index, its performance will suffer during conditions in which the Index rises.
Advisers Investment Strategy Risk
The Adviser utilizes a quantitative methodology to select investments for the Fund. Although this methodology is designed to correlate the Funds performance with the performance of the Index, there is no assurance that such methodology will be successful and will enable the Fund to achieve its investment objective.
10 | DIREXION SHARES ETF TRUST PROSPECTUS |
Cash Transaction Risk
Unlike most ETFs, the Fund currently intends to effect creations and redemptions principally for cash, rather than principally for in-kind securities, because of the nature of the financial instruments held by the Fund. As such, investments in Shares may be less tax efficient than investments in conventional ETFs.
Chilean Securities Risk
Investment in securities of Chilean issuers involves risks that may be greater than if the Funds investments were more geographically diverse. Chiles economy is heavily dependent on trading with key partners. Any increases or decreases in the volume of this trading, changes in taxes or tariffs, or variance in political relationships between nations may impact the Chilean economy overall in a way that would be adverse to the Funds investments. Additionally, investment in Chile may be subject to any positive or adverse effects of the varying nature of its economic landscape with respect to expropriation and/or nationalization of assets, strengthened or lessened restrictions on and government intervention in international trade, confiscatory taxation, political instability, including authoritarian and/or military involvement in governmental decision making, armed conflict, the impact on the economy as a result of civil war and social instability as a result of religious, ethnic and/or socioeconomic unrest.
Counterparty Risk
The Fund may invest in financial instruments involving counterparties for the purpose of attempting to gain exposure to a particular group of securities or an asset class without actually purchasing those securities or investments, or to hedge a position. These financial instruments may include swap agreements. The use of swap agreements and other counterparty instruments involves risks that are different from those associated with ordinary portfolio securities transactions. For example, the Fund bears the risk of loss of the amount expected to be received under a swap agreement in the event of the default or bankruptcy of a swap agreement counterparty. Swap agreements and other counterparty instruments also may be considered to be illiquid. In addition, the Fund may enter into swap agreements that involve a limited number of counterparties, which may increase the Funds exposure to counterparty credit risk. The Fund does not specifically limit its counterparty risk with respect to any single counterparty. Further, there is a risk that no suitable counterparties will be willing to enter into, or continue to enter into, transactions with the Fund and, as a result, the Fund may not be able to achieve its investment objective.
Currency Exchange Rate Risk
Changes in foreign currency exchange rates will affect the value of what the Fund owns and the Funds share price. Generally, when the U.S. dollar rises in value against a foreign currency, an investment in that country loses value because that currency is worth fewer U.S. dollars. Devaluation of a currency by a countrys government or banking authority also will have a significant impact on the value of any investments denominated in that currency. Currency markets generally are not as regulated as securities markets.
Daily Correlation Risk
There is no guarantee that the Fund will achieve a high degree of correlation to the Index and therefore achieve its daily investment objective. To achieve a high degree of correlation with the Index, the Fund seeks to rebalance its portfolio daily to keep leverage consistent with its daily target. The Fund may have difficulty achieving its daily target due to fees and expenses, high portfolio turnover, transaction costs and costs associated with the use of leveraged investment techniques and/or a temporary lack of liquidity in the markets for the securities held by the Fund. Market disruptions, regulatory restrictions or extreme volatility will also adversely affect the Funds ability to adjust exposure to the required levels. The Fund may not have investment exposure to all securities in its underlying Index, or its weighting of investment exposure to such stocks or industries may be different from that of the Index. In addition, the Fund may invest in securities or financial instruments not included in the underlying Index. The Fund may be subject to large movements of assets into and out of the Fund, potentially resulting in the Fund being over- or under-exposed to its Index. In addition, the target amount of portfolio exposure to the Index is impacted dynamically by the Indexs movement. Because of this, it is unlikely that the Fund will be perfectly exposed to the Index at the end of each day. The possibility of the Fund being materially over- or under-exposed to its Index increases on days when the Index is volatile near the close of the trading day. Activities surrounding annual index reconstitutions and other index rebalancing or reconstitution events may hinder the Funds ability to meet its daily investment objective on that day.
Derivatives Risk
The Fund uses investment techniques, including investments in derivatives such as futures and forward contracts, options and swaps, which may be considered aggressive. Investments in such derivatives are subject to market risks that may cause their prices to fluctuate over time and may increase the volatility of the Fund. The use of derivatives may expose the Fund to additional risks that it would not be subject to if it invested directly in the securities underlying
DIREXION SHARES ETF TRUST PROSPECTUS | 11 |
those derivatives, such as counterparty risk and the risk that the derivatives may become illiquid. The use of derivatives may result in larger losses or smaller gains than otherwise would be the case. Additionally, with respect to the use of swap agreements, if the Index has a dramatic intraday move in value that causes a material decline in the Funds net asset value (NAV), the terms of the swap agreement between the Fund and its counterparty may allow the counterparty to immediately close out of the transaction with the Fund. In such circumstances, the Fund may be unable to enter into another swap agreement or invest in other derivatives to achieve the desired exposure consistent with the Funds daily investment objective. This may prevent the Fund from achieving its daily investment objective particularly if the Index reverses all or a portion of its intraday move by the end of the day. In addition, the Funds investments in derivatives, as of the date of this Prospectus, are subject to the following risks:
Futures and Forward Contracts. There may be an imperfect correlation between the changes in market value of the securities held by the Fund and the prices of futures contracts. There may not be a liquid secondary market for the futures contracts. Forward currency transactions include the risks associated with fluctuations in currency.
Options . There may be an imperfect correlation between the prices of options and movements in the price of the securities (or indices) hedged or used for cover, which may cause a given hedge not to achieve its objective.
Swap Agreements . Interest rate swaps are subject to interest rate and credit risk. Total return swaps are subject to counterparty risk, which relates to credit risk of the counterparty and liquidity risk of the swaps themselves.
Early Close/Trading Halt Risk
An exchange or market may close or issue trading halts on specific securities, or the ability to buy or sell certain securities or financial instruments may be restricted, which may result in the Fund being unable to buy or sell certain securities or financial instruments. In such circumstances, the Fund may be unable to rebalance its portfolio, may be unable to accurately price its investments and/or may incur substantial trading losses.
Effects of Compounding and Market Volatility Risk
The Fund does not attempt to, and should not be expected to, provide returns which are a multiple of the return of the Index for periods other than a single day. The Fund rebalances its portfolio on a daily basis, increasing exposure in response to that days gains or reducing exposure in response to that days losses. This means that for a period longer than one day, the pursuit of daily goals may result in daily leveraged compounding. It also means that the return of an index over a period of time greater than one day multiplied by the Funds daily target (300%) generally will not equal the Funds performance over that same period.
As a result, over time, the cumulative percentage increase or decrease in the value of the Funds portfolio may diverge significantly from the cumulative percentage increase or decrease in the multiple of the return of the Funds underlying index due to the compounding effect of losses and gains on the returns of the Fund. It also is expected that the Funds use of leverage will cause the Fund to underperform the return of three times its benchmark in a trendless or flat market.
The effect of compounding becomes more pronounced on the Funds performance as the Index experiences volatility. The Indexs volatility rate is a statistical measure of the magnitude of fluctuations in the returns of the Index. The table below provides examples of how Index volatility could affect the Funds performance. The chart shows estimated Fund returns for a number of combinations of performance and volatility over a one-year period and is shown to illustrate how holding the Fund for a period longer than one day may negatively impact investment return. As shown below, this Fund, or any other 3X Bear Fund, would be expected to lose 31.3% (as shown in Table 1 below) if its Index provided no return over a one year period during which the Index experienced annualized volatility of 25%. If the Indexs annualized volatility were to rise to 75%, the hypothetical loss for a one year period for the Fund widens to approximately 96.6%.
At higher ranges of volatility, there is a chance of a near complete loss of value even if the Index is flat. For instance, if the Indexs annualized volatility is 100%, the Fund would be expected to lose approximately 100% of its value, even if the cumulative Index return for the year was only 0%.
Table 1
One
Return |
300%
Return |
Volatility Rate | ||||||||||||||||||||||||
10% | 25% | 50% | 75% | 100% | ||||||||||||||||||||||
60% | 180% | 1371.5% | 973.9% | 248.6% | 46.5% | 96.1% | ||||||||||||||||||||
50% | 150% | 653.4% | 449.8% | 78.5% | 72.6% | 98.0% | ||||||||||||||||||||
40% | 120% | 336.0% | 218.2% | 3.3% | 84.2% | 98.9% | ||||||||||||||||||||
30% | 90% | 174.6% | 100.4% | 34.9% | 90.0% | 99.3% | ||||||||||||||||||||
20% | 60% | 83.9% | 34.2% | 56.4% | 93.3% | 99.5% | ||||||||||||||||||||
10% | 30% | 29.2% | 5.7% | 69.4% | 95.3% | 99.7% | ||||||||||||||||||||
0% | 0% | 5.8% | 31.3% | 77.7% | 96.6% | 99.8% | ||||||||||||||||||||
10% | 30% | 29.2% | 48.4% | 83.2% | 97.4% | 99.8% | ||||||||||||||||||||
20% | 60% | 45.5% | 60.2% | 87.1% | 98.0% | 99.9% | ||||||||||||||||||||
30% | 90% | 57.1% | 68.7% | 89.8% | 98.4% | 99.9% | ||||||||||||||||||||
40% | 120% | 65.7% | 75.0% | 91.9% | 98.8% | 99.9% | ||||||||||||||||||||
50% | 150% | 72.1% | 79.6% | 93.4% | 99.0% | 99.9% | ||||||||||||||||||||
60% | 180% | 77.0% | 83.2% | 94.6% | 99.2% | 99.9% |
12 | DIREXION SHARES ETF TRUST PROSPECTUS |
The Indexs annualized historical volatility rate for the period from May 30, 2008 through May 31, 2013 is 25.33%. The Indexs highest volatility rate for any one calendar year during the five-year period is 40.95% and volatility for a shorter period of time may have been substantially higher. The Indexs annualized performance for the five-year period from May 30, 2008 through May 31, 2013 is 5.82%. Historical Index volatility and performance are not indications of what the Index volatility and performance will be in the future.
For additional graphs and charts demonstrating the effects of volatility and index performance on the long-term performance of the Fund, see Additional Information Regarding Investment Techniques and Policies and Negative Implications of Daily Goals in Volatile Markets in the Funds statutory prospectus, and Special Note Regarding the Correlation Risks of the Funds in the Funds Statement of Additional Information.
Holding an unmanaged position opens the investor to the risk of market volatility adversely affecting the performance of the investment. The Fund is not appropriate for investors who do not intend to actively monitor and manage their portfolios. This table is intended to underscore the fact that the Fund is designed as a short-term trading vehicle for investors who intend to actively monitor and manage their portfolios.
To fully understand the risks of market volatility on the Fund, see Negative Implications of Daily Goals in Volatile Markets found in the statutory prospectus.
Emerging Markets Risk
Indirectly investing in emerging markets instruments involve greater risks than indirectly investing in foreign instruments in general. Risks of investing in emerging market countries include: political or social upheaval; nationalization of businesses; restrictions on foreign ownership; prohibitions on the repatriation of assets; and risks from an economys dependence on revenues from particular commodities or industries. In addition, currency transfer restrictions, limited potential buyers for such instruments, delays and disruption in settlement procedures and illiquidity or low volumes of transactions may make exits difficult or impossible at times.
Foreign Securities Risk
Indirectly investing in foreign instruments may involve greater risks than investing in domestic instruments. As a result, the Funds returns and NAVs may be affected to a large degree by fluctuations in currency exchange rates, interest rates, political, diplomatic or economic conditions and regulatory requirements in other countries. The laws and accounting, auditing, and financial reporting standards in foreign countries typically are not as strict as they are in the U.S., and there may be less public information available about foreign companies.
Gain Limitation Risk
If the Funds benchmark moves more than 33% on a given trading day in a direction adverse to the Fund, you would lose all of your money. Rafferty will attempt to position the Funds portfolio to ensure that the Fund does not lose more than 90% of its NAV on a given day. The cost of such downside protection will be limitations on the Funds gains. As a consequence, the Funds portfolio may not be responsive to Index losses beyond 30% in a given day. For example, if the Index were to lose 35%, the Fund might be limited to a daily gain of 90% rather than 105%, which is 300% of the Index loss of 35%.
Geographic Concentration Risk
Investments in a particular country or geographic region may be particularly susceptible to political, diplomatic or economic conditions and regulatory requirements. As a result, the Fund may be more volatile than a more geographically diversified fund.
High Portfolio Turnover Risk
Daily rebalancing of the Funds holdings pursuant to its daily investment objective causes a much greater number of portfolio transactions when compared to most exchange-traded funds. Such frequent and active trading leads to significantly higher transaction costs because of increased broker commissions resulting from such transactions. In addition, there is the possibility of significantly increased capital gains, including short-term and/or long-term capital gains that will be taxable to shareholders as ordinary income. The Fund calculates portfolio turnover without including the short term cash instruments or derivative transactions that comprise the majority of the Funds trading. As such, if the Funds extensive use of derivative instruments were reflected, the calculated portfolio turnover rate would be significantly higher.
Intra-Day Investment Risk
The Fund seeks leveraged investment results from the close of the market on a given trading day until the close of the market on the subsequent trading day. The exact exposure of an investment in the Fund intraday in the secondary market is a function of the difference between the value of the Index at the market close on the first trading day and the value of the Index at the time of purchase. The Funds gains occur as its market exposure declines and its losses are accompanied by increases in market exposure. If the Index declines, the Funds net assets will rise by an amount equal to the decline in the Funds exposure. Conversely, if the Index rises the Funds net assets will decline by the same amount as the increase in the Funds exposure. As an example (using simplified numbers), if the Fund had $100 in
DIREXION SHARES ETF TRUST PROSPECTUS | 13 |
net assets at the market close, it would seek $300 of exposure to the next trading days Index performance. If the Index declined by 1% by noon the following trading day, the exposure of the Fund will fall by 1% to $297 and the net assets will rise by $3 to $103. With net assets of $103 and exposure of $297, a purchaser at that point would be receiving 288% exposure of her investment instead of 300%
Inverse Correlation Risk
Shareholders should lose money when the Index rises, which is a result that is the opposite from traditional funds.
Leverage Risk
If you invest in the Fund, you are exposed to the risk that an increase in the daily performance of the Index will be leveraged. This means that your investment in the Fund will be reduced by an amount equal to 3% for every 1% daily increase, not including the cost of financing the portfolio and the impact of operating expenses, which would further lower your investment. The Fund could theoretically lose an amount greater than its net assets in the event of an Index increase of more than 33%. Further, purchasing shares during a day may result in greater than 300% exposure to the performance of the Index if the Index rises between the close of the markets on one trading day and before the close of the markets on the next trading day.
To fully understand the risks of using leverage in the Fund, see Effects of Compounding and Market Volatility Risk above.
Liquidity Risk
Some securities held by the Fund, including derivatives, may be difficult to sell or illiquid, particularly during times of market turmoil. Illiquid securities also may be difficult to value. If the Fund is forced to sell an illiquid security at an unfavorable time or at a price that is lower than Raffertys judgment of the securitys true market value, the Fund may be forced to sell the security at a loss. Such a situation may prevent the Fund from limiting losses, realizing gains or achieving a high correlation with the Index.
Market Risk
The Fund is subject to market risks that can affect the value of its shares. These risks include political, regulatory, market and economic developments, including developments that impact specific economic sectors, industries or segments of the market.
Market Timing Risk
Rafferty expects a significant portion of the assets of the Fund to come from professional money managers and investors who use the Funds as part of asset allocation and market timing investment strategies. These strategies often call for frequent trading which may lead to increased portfolio turnover, higher transaction costs, and the possibility of increased capital gains, including short-term and/or long-term capital gain that will be taxable to shareholders as ordinary income.
Non-Diversification Risk
The Fund is non-diversified, which means it invests a high percentage of its assets in a limited number of securities. A non-diversified funds NAV and total return may fluctuate more or fall greater in times of weaker markets than a conventional diversified fund.
Regulatory Risk
The Fund is subject to the risk that a change in U.S. law and related regulations will impact the way the Fund operates, increase the particular costs of the Funds operations and/or change the competitive landscape.
Risks of Investing in Other Investment Companies (including ETFs)
Investments in the securities of other investment companies, including ETFs, may involve duplication of advisory fees and certain other expenses. Fund shareholders indirectly bear the Funds proportionate share of the fees and expenses indirectly paid by shareholders of the other investment company or ETF, in addition to the fees and expenses Fund shareholders bear in connection with the Funds own operations. The Funds performance may be magnified positively or negatively by virtue of its investment in other investment companies. If the investment company or ETF fails to achieve its investment objective, the value of the Funds investment will decline, adversely affecting the Funds performance. In addition, closed end investment company and ETF shares potentially may trade at a discount or a premium and are subject to brokerage and other trading costs, which could result in greater expenses to the Fund. Finally, because the value of ETF shares depends on the demand in the market, the Adviser may not be able to liquidate the Funds holdings in those shares at the most optimal time, adversely affecting the Funds performance.
14 | DIREXION SHARES ETF TRUST PROSPECTUS |
Shorting Risk
The Fund may engage in short sales designed to earn the Fund a profit from the decline in the price of particular securities, baskets of securities or indices. However, there is a risk that the Fund will experience a loss as a result of engaging in these short sales.
Small and Mid Capitalization Company Risk
Investing in the securities of small and/or mid capitalization companies, and securities that provide exposure to small and/or mid capitalization companies, involves greater risks and the possibility of greater price volatility than investing in more-established, larger capitalization companies. Small and mid capitalization companies often have narrower markets for their goods and/or services and more limited managerial and financial resources than larger, more established companies. Furthermore, those companies often have limited product lines, services, markets, financial resources or are dependent on a small management group. In addition, because these stocks are not well-known to the investing public, do not have significant institutional ownership and are followed by relatively few security analysts, there will normally be less publicly available information concerning these securities compared to what is available for the securities of larger companies. Adverse publicity and investor perceptions, whether based on fundamental analysis, can decrease the value and liquidity of securities held by the Fund. As a result, their performance can be more volatile and they face greater risk of business failure, which could increase the volatility of the Funds portfolio.
Tax and Distribution Risk
The Fund has extremely high portfolio turnover which causes the Fund to generate significant amounts of taxable income. This income is typically short-term capital gain, which is generally treated as ordinary income when distributed to shareholders, or short-term capital loss. The Fund rarely generates long-term capital gain or loss. The Fund will generally need to distribute net short-term capital gain to satisfy certain tax requirements. As a result of the Funds high portfolio turnover, the Fund could make larger and/or more frequent distributions than traditional unleveraged ETFs. Because the Funds asset level changes frequently, these distributions could comprise a substantial portion or even all of the Funds net assets if the Fund distributes this income after a decline in its net assets. In addition, the Fund may be held by short-term investors and these investors may exit the Fund prior to the record date of a distribution. As a result, shareholders in the Fund on the day of a distribution may receive substantial distributions, which could lead to negative tax implications for such shareholders. Potential investors are urged to consult their own tax advisers for more detailed information.
Rules governing the federal income tax aspects of certain derivatives, including total return equity swaps, real estate-related swaps, credit default swaps and other credit derivatives are not entirely clear. Because the Funds status as a regulated investment company might be affected if the Internal Revenue Service did not accept the Funds treatment of certain transactions involving derivatives, the Funds ability to engage in these transactions may be limited.
Tracking Error Risk
The Fund may have difficulty achieving its daily target due to fees and expenses, high portfolio turnover, transaction costs, and/or a temporary lack of liquidity in the markets for the securities held by the Fund. A failure to achieve a daily target may cause the Fund to provide returns for a longer period that are worse than expected. In addition, even though the Fund may meet its daily target for a period of time, this will not necessarily produce the returns that might be expected in light of the returns of the Index or the Funds benchmark for that period.
Valuation Time Risk
The Fund values its portfolio as of the close of regular trading on the New York Stock Exchange (NYSE) (generally 4:00 P.M. Eastern time). In some cases, foreign market indices close before the NYSE opens or may not be open for business on the same calendar days as the Fund. As a result, the daily performance of the Fund can vary from the performance of the Index.
Special Risks of Exchange-Traded Funds
Not Individually Redeemable. Shares are not individually redeemable and may be redeemed by the Fund at NAV only in large blocks known as Creation Units. You may incur brokerage costs purchasing enough Shares to constitute a Creation Unit.
Trading Issues. Trading in Shares on an exchange may be halted due to market conditions or for reasons that, in the view of that exchange, make trading in Shares inadvisable, such as extraordinary market volatility or other reasons. There can be no assurance that Shares will continue to meet the listing requirements of the exchange on which it trades, and the listing requirements may be amended from time to time.
Market Price Variance Risk. Individual Shares of the Fund that are listed for trading on an exchange can be bought and sold in the secondary market at market prices. The market prices of Shares will fluctuate in response to changes in NAV and supply and demand for Shares. The Adviser cannot predict whether Shares will trade above, below or at their NAV. Differences between secondary market prices and
DIREXION SHARES ETF TRUST PROSPECTUS | 15 |
NAV for Shares may be due largely to supply and demand forces in the secondary market, which forces may not be the same as those influencing prices for securities or instruments held by the Fund at a particular time. Given the fact that Shares can be created and redeemed in Creation Units, the Adviser believes that large discounts or premiums to the NAV of Shares should not be sustained. There may, however, be times when the market price and the NAV vary significantly and you may pay more than NAV when buying Shares on the secondary market, and you may receive less than NAV when you sell those Shares. The market price of Shares, like the price of any exchange-traded security, includes a bid-ask spread charged by the exchange specialists, market makers or other participants that trade the particular security. In times of severe market disruption, the bid-ask spread often increases significantly. This means that Shares may trade at a discount to NAV and the discount is likely to be greatest when the price of Shares is falling fastest, which may be the time that you most want to sell your Shares. The Funds investment results are measured based upon the daily NAV of the Fund over a period of time. Investors purchasing and selling Shares in the secondary market may not experience investment results consistent with those experienced by those creating and redeeming directly with the Fund. There is no guarantee that an active secondary market will develop for Shares of the Fund.
Fund Performance
The Fund has not yet commenced operations; therefore, performance information is not yet available. In the future, performance information for the Fund will be presented in this section. Performance information also will be available on the Funds website at http://www.direxionfunds.com/products?presets=etfs&activetab=performance or by calling the Fund toll free at 1-866-476-7523.
Management
Investment Adviser
Rafferty Asset Management, LLC is the Funds investment adviser.
Portfolio Manager
Paul Brigandi, the Funds Portfolio Manager, is primarily responsible for the day-to-day management of the Fund and has served in this role since the Funds inception.
Purchase and Sale of Fund Shares
The Fund will issue and redeem Shares in exchange for cash only to Authorized Participants in large blocks, known as Creation Units, each of which is comprised of 50,000 Shares. Retail investors may only purchase and sell Fund Shares on a national securities exchange through a broker-dealer. Because the Shares trade at market prices rather than NAV, Shares may trade at a price greater than NAV (premium) or less than NAV (discount).
Tax Information
The Fund intends to make distributions that may be taxed as ordinary income or long-term capital gains. Those distributions will be subject to federal income taxes and may also be subject to state and local taxes. Distributions by the Fund may be significantly higher than those of most exchange-traded funds.
Payments to Broker-Dealers and Other Financial Intermediaries
If you purchase the Fund through a broker-dealer or other financial intermediary (such as a bank or financial advisor), the Fund and/or the Adviser may pay the intermediary for the sale of Fund shares and related services. These payments may create a conflict of interest by influencing the broker-dealer or other financial intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your financial intermediarys website for more information.
16 | DIREXION SHARES ETF TRUST PROSPECTUS |
Direxion Daily Hong Kong Bull 3X Shares
Important Information Regarding the Fund
The Direxion Daily Hong Kong Bull 3X Shares (Fund) seeks daily leveraged investment results. The pursuit of daily leveraged goals means that the Fund is riskier than alternatives that do not use leverage because the Funds objective is to magnify the performance of an index. The pursuit of daily leveraged investment goals means that the return of the Fund for a period longer than a full trading day may bear no resemblance to 300% of the return of its index for such longer period because the aggregate return of the Fund is the product of the series of daily leveraged returns for each trading day. The path of the benchmark during the longer period may be at least as important to the Funds return for the longer period as the cumulative return of the benchmark for the relevant longer period, especially in periods of market volatility. Further, the return for investors that invest for periods less than a full trading day or for a period different than a trading day will not be the product of the return of the Funds stated goal and the performance of the target index for the full trading day.
Investment Objective
The Fund seeks daily investment results, before fees and expenses, of 300% of the performance of the MSCI Hong Kong Index. The Fund seeks daily leveraged investment results and does not seek to achieve its stated investment objective over a period of time greater than one day. The Fund is different and much riskier than most exchange-traded funds.
The Fund is designed to be utilized only by knowledgeable investors who understand the potential consequences of seeking daily leveraged investment results, understand the risks associated with the use of leverage and are willing to monitor their portfolios frequently. The Fund seeks daily leveraged investment results relative to the Index and is different and riskier than similarly benchmarked exchange-traded funds that do not use leverage. Therefore, the Fund is not intended to be used by, and is not appropriate for, investors who do not intend to actively monitor and manage their portfolios.
Fees and Expenses of the Fund
This table describes the fees and expenses that you may pay if you buy or hold shares of the Fund (Shares). Investors purchasing shares in the secondary market may pay costs (including customary brokerage commissions) charged by their broker.
Annual Fund Operating Expenses (1) (expenses that you pay each year as a percentage of the value of your investment)
Management Fees |
0.75% | |||
Distribution and/or Service (12b-1) Fees |
0.00% | |||
Other Expenses of the Fund |
0.25% | |||
Acquired Fund Fees and Expenses |
0.13% | |||
|
|
|||
Total Annual Fund Operating Expenses |
1.13% | |||
Expense Cap/Reimbursement |
(0.05% | ) | ||
|
|
|||
Total Annual Fund Operating Expenses After Expense Cap/Reimbursement |
1.08% | |||
|
|
(1) |
The Funds adviser, Rafferty Asset Management, LLC (Rafferty or the Adviser) has contractually agreed to cap all or a portion of its management fee and/or reimburse the Fund for Other Expenses through March 1, 2015, to the extent that the Funds Total Annual Operating Expenses exceed 0.95% (excluding, as applicable, among other expenses, taxes, leverage interest, Acquired Fund Fees and Expenses, dividends or interest on short positions, other interest expenses, brokerage commissions, expenses incurred in connection with any merger or reorganization and extraordinary expenses such as litigation). Any expense cap is subject to reimbursement by the Fund within the following three years only if overall expenses fall below these percentage limitations. This agreement may be terminated or revised at any time with the consent of the Board of Trustees. |
Expense Example
This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund for the time periods indicated and then redeem all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Funds operating expenses remain the same. Although your actual costs may be higher or lower, based on these assumptions your costs would be:
1 Year | 3 Years | |
|
||
$110 | $354 |
Portfolio Turnover
The Fund pays transaction costs, such as commissions, when it buys and sells securities (or turns over its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in a taxable account. These costs, which are not reflected in Annual Fund Operating Expenses or in the example, affect the Funds performance.
DIREXION SHARES ETF TRUST PROSPECTUS | 17 |
Principal Investment Strategies
The Fund, under normal circumstances, creates long positions by investing at least 80% of its assets in the securities that comprise the MSCI Hong Kong Index (Index) and/or financial instruments that provide leveraged and unleveraged exposure to the Index. These financial instruments include: futures contracts; options on securities, indices and futures contracts; equity caps, floors and collars; swap agreements; forward contracts; short positions; reverse repurchase agreements; exchange-traded funds (ETFs); and other financial instruments. On a day-to-day basis, the Fund also may hold short-term debt instruments that have terms-to-maturity of less than 397 days and exhibit high quality credit profiles, including U.S. government securities and repurchase agreements.
Hong Kong is considered an emerging market, as that term is defined by the index provider. The determination that Hong Kong is an emerging market is based on it being an economy that is in the initial stages of industrialization and has been historically marked by low per capita income and lack of capital market transparency, but appears to be implementing political and/or market reforms resulting in greater capital market transparency, increased access for foreign investors and generally improved economic conditions. Emerging markets have the potential for significantly higher or lower rates of return and carry greater risks than more developed economies.
The Index is designed to measure the performance of the large and mid cap segments of the Hong Kong equity market, covering approximately 85% of the free float-adjusted market capitalization in Hong Kong. As of the date of its last reconstitution, the Index had a total dollar value of approximately $662.8 billion, composed of 41 constituent securities ranging in market capitalization from approximately $2.9 billion to $207.3 billion. Additionally, as of May 31, 2013, the Index is concentrated in the financial sector, but this concentration may change in the future based on the Indexs methodology and the varying nature of Hong Kongs economy.
The Fund may gain exposure to only a representative sample of the securities in the Index that have aggregate characteristics similar to those of the Index. The Fund gains this exposure either by directly investing in the underlying securities of the Index or by investing in derivatives that provide exposure to those securities. The Fund seeks to remain fully invested at all times consistent with its stated goal. At the close of the markets each trading day, Rafferty positions the Funds portfolio so that its exposure to the Index is consistent with the Funds investment objective. The impact of the Indexs movements during the day will affect whether the Funds portfolio needs to be re-positioned. For example, if the Index has risen on a given day, net assets of the Fund should rise, meaning that the Funds exposure will need to be increased. Conversely, if the Index has fallen on a given day, net assets of the Fund should fall, meaning the Funds exposure will need to be reduced. This re-positioning strategy typically results in high portfolio turnover.
Because of daily rebalancing and the compounding of each days return over time, the return of the Fund for periods longer than a single day will be the result of each days returns compounded over the period, which will very likely differ from 300% of the return of the Index over the same period. The Fund will lose money if the Index performance is flat over time, and as a result of daily rebalancing, the Indexs volatility and the effects of compounding, it is even possible that the Fund will lose money over time while the Indexs performance increases.
Additionally, because a significant portion of the assets of the Fund may come from investors using asset allocation and market timing investment strategies, the Fund may further need to engage in frequent trading. The Fund will concentrate its investment in a particular industry or group of industries to approximately the same extent as the Index is so concentrated.
Principal Risks
An investment in the Fund entails risk. The Fund could lose money or its performance could trail that of other investment alternatives. The Adviser cannot guarantee that the Fund will achieve its objective. In addition, the Fund presents some risks not traditionally associated with most mutual funds and exchange-traded funds. It is important that investors closely review all of the risks listed below and understand how these risks interrelate before making an investment in the Fund. Turbulence in financial markets and reduced liquidity in equity, credit and fixed income markets could negatively affect issuers worldwide, including the Fund. There is the risk that you could lose all or a portion of your money invested in the Fund.
Adverse Market Conditions Risk
Because the Fund magnifies the performance of the Index, its performance will suffer during conditions in which the Index declines.
Advisers Investment Strategy Risk
The Adviser utilizes a quantitative methodology to select investments for the Fund. Although this methodology is designed to correlate the Funds performance with the performance of the Index, there is no assurance that such methodology will be successful and will enable the Fund to achieve its investment objective.
18 | DIREXION SHARES ETF TRUST PROSPECTUS |
Concentration Risk
The Index is concentrated in the financial sector, however, in the future, the Index concentration may change. The Fund will concentrate its investments in a particular industry or group of industries to approximately the same extent as the Index is so concentrated. The performance of the Fund may be more volatile than a fund that does not concentrate its investments in a specific industry or group of industries. The Fund also may be more susceptible to any single economic market, political or regulatory occurrence affecting that industry or group of industries. However, the Fund only may concentrate its investments ( i.e. , hold 25% or more of its total assets in the stocks of a particular industry or group of industries) to approximately the same extent that its underlying index concentrates in the stocks of a particular industry or group of industries. For purposes of this limitation, securities of the U.S. Government (including its agencies and instrumentalities), repurchase agreements collateralized by U.S. Government securities, and securities of state or municipal governments and their political subdivisions are not considered to be issued by members of any industry.
Counterparty Risk
The Fund may invest in financial instruments involving counterparties for the purpose of attempting to gain exposure to a particular group of securities or an asset class without actually purchasing those securities or investments, or to hedge a position. These financial instruments may include swap agreements. The use of swap agreements and other counterparty instruments involves risks that are different from those associated with ordinary portfolio securities transactions. For example, the Fund bears the risk of loss of the amount expected to be received under a swap agreement in the event of the default or bankruptcy of a swap agreement counterparty. Swap agreements and other counterparty instruments also may be considered to be illiquid. In addition, the Fund may enter into swap agreements that involve a limited number of counterparties, which may increase the Funds exposure to counterparty credit risk. The Fund does not specifically limit its counterparty risk with respect to any single counterparty. Further, there is a risk that no suitable counterparties will be willing to enter into, or continue to enter into, transactions with the Fund and, as a result, the Fund may not be able to achieve its investment objective.
Currency Exchange Rate Risk
Changes in foreign currency exchange rates will affect the value of what the Fund owns and the Funds share price. Generally, when the U.S. dollar rises in value against a foreign currency, an investment in that country loses value because that currency is worth fewer U.S. dollars. Devaluation of a currency by a countrys government or banking authority also will have a significant impact on the value of any investments denominated in that currency. Currency markets generally are not as regulated as securities markets.
Daily Correlation Risk
There is no guarantee that the Fund will achieve a high degree of correlation to the Index and therefore achieve its daily investment objective. To achieve a high degree of correlation with the Index, the Fund seeks to rebalance its portfolio daily to keep leverage consistent with its daily target. The Fund may have difficulty achieving its daily target due to fees and expenses, high portfolio turnover, transaction costs and costs associated with the use of leveraged investment techniques and/or a temporary lack of liquidity in the markets for the securities held by the Fund. Market disruptions, regulatory restrictions or extreme volatility will also adversely affect the Funds ability to adjust exposure to the required levels. The Fund may not have investment exposure to all securities in its underlying Index, or its weighting of investment exposure to such stocks or industries may be different from that of the Index. In addition, the Fund may invest in securities or financial instruments not included in the underlying Index. The Fund may be subject to large movements of assets into and out of the Fund, potentially resulting in the Fund being over- or under-exposed to its Index. In addition, the target amount of portfolio exposure to the Index is impacted dynamically by the Indexs movement. Because of this, it is unlikely that the Fund will be perfectly exposed to the Index at the end of each day. The possibility of the Fund being materially over- or under-exposed to its Index increases on days when the Index is volatile near the close of the trading day. Activities surrounding annual index reconstitutions and other index rebalancing or reconstitution events may hinder the Funds ability to meet its daily investment objective on that day.
Depositary Receipt Risk
To the extent the Fund seeks exposure to foreign companies, the Funds investments may be in the form of depositary receipts or other securities convertible into securities of foreign issuers, including American Depositary Receipts (ADRs), European Depositary Receipts (EDRs), and Global Depositary Receipts (GDRs). While the use of ADRs, EDRs and GDRs, which are traded on exchanges and represent and ownership in a foreign security, provide an alternative to directly purchasing the underlying foreign securities in their respective national markets and currencies, investments in ADRs, EDRs, and GDRs continue to be subject to certain of the risks associated with investing directly in foreign securities.
DIREXION SHARES ETF TRUST PROSPECTUS | 19 |
Derivatives Risk
The Fund uses investment techniques, including investments in derivatives such as futures and forward contracts, options and swaps, which may be considered aggressive. Investments in such derivatives are subject to market risks that may cause their prices to fluctuate over time and may increase the volatility of the Fund. The use of derivatives may expose the Fund to additional risks that it would not be subject to if it invested directly in the securities underlying those derivatives, such as counterparty risk and the risk that the derivatives may become illiquid. The use of derivatives may result in larger losses or smaller gains than otherwise would be the case. Additionally, with respect to the use of swap agreements, if the Index has a dramatic intraday move in value that causes a material decline in the Funds net asset value (NAV), the terms of the swap agreement between the Fund and its counterparty may allow the counterparty to immediately close out of the transaction with the Fund. In such circumstances, the Fund may be unable to enter into another swap agreement or invest in other derivatives to achieve the desired exposure consistent with the Funds daily investment objective. This may prevent the Fund from achieving its daily investment objective particularly if the Index reverses all or a portion of its intraday move by the end of the day. In addition, the Funds investments in derivatives, as of the date of this Prospectus, are subject to the following risks:
Futures and Forward Contracts . There may be an imperfect correlation between the changes in market value of the securities held by the Fund and the prices of futures contracts. There may not be a liquid secondary market for the futures contracts. Forward currency transactions include the risks associated with fluctuations in currency.
Options . There may be an imperfect correlation between the prices of options and movements in the price of the securities (or indices) hedged or used for cover, which may cause a given hedge not to achieve its objective.
Swap Agreements . Interest rate swaps are subject to interest rate and credit risk. Total return swaps are subject to counterparty risk, which relates to credit risk of the counterparty and liquidity risk of the swaps themselves.
Early Close/Trading Halt Risk
An exchange or market may close or issue trading halts on specific securities, or the ability to buy or sell certain securities or financial instruments may be restricted, which may result in the Fund being unable to buy or sell certain securities or financial instruments. In such circumstances, the Fund may be unable to rebalance its portfolio, may be unable to accurately price its investments and/or may incur substantial trading losses.
Effects of Compounding and Market Volatility Risk
The Fund does not attempt to, and should not be expected to, provide returns which are a multiple of the return of the Index for periods other than a single day. The Fund rebalances its portfolio on a daily basis, increasing exposure in response to that days gains or reducing exposure in response to that days losses. This means that for a period longer than one day, the pursuit of daily goals may result in daily leveraged compounding. It also means that the return of an index over a period of time greater than one day multiplied by the Funds daily target (300%) generally will not equal the Funds performance over that same period.
As a result, over time, the cumulative percentage increase or decrease in the value of the Funds portfolio may diverge significantly from the cumulative percentage increase or decrease in the multiple of the return of the Funds underlying index due to the compounding effect of losses and gains on the returns of the Fund. It also is expected that the Funds use of leverage will cause the Fund to underperform the return of three times its benchmark in a trendless or flat market.
The effect of compounding becomes more pronounced on the Funds performance as the Index experiences volatility. The Indexs volatility rate is a statistical measure of the magnitude of fluctuations in the returns of the Index. The table below provides examples of how Index volatility could affect the Funds performance. The chart shows estimated Fund returns for a number of combinations of performance and volatility over a one-year period and is shown to illustrate how holding the Fund for a period longer than one day may negatively impact investment return. As shown below, this Fund, or any other 3X Bull Fund, would be expected to lose 17.1% (as shown in Table 1 below) if its Index provided no return over a one year period during which the Index experienced annualized volatility of 25%. If the Indexs annualized volatility were to rise to 75%, the hypothetical loss for a one year period for the Fund widens to approximately 81.5%.
At higher ranges of volatility, there is a chance of a near complete loss of value even if the Index is flat. For instance, if the Indexs annualized volatility is 100%, the Fund would be expected to lose 95% of its value, even if the cumulative Index return for the year was only 0%.
20 | DIREXION SHARES ETF TRUST PROSPECTUS |
Table 1
One
Year Index Return |
300%
Return |
Volatility Rate | ||||||||||||||||||||||||
10% | 25% | 50% | 75% | 100% | ||||||||||||||||||||||
60% | 180% | 93.8% | 94.7% | 97.0% | 98.8% | 99.7% | ||||||||||||||||||||
50% | 150% | 87.9% | 89.6% | 94.1% | 97.7% | 99.4% | ||||||||||||||||||||
40% | 120% | 79.0% | 82.1% | 89.8% | 96.0% | 98.9% | ||||||||||||||||||||
30% | 90% | 66.7% | 71.6% | 83.8% | 93.7% | 98.3% | ||||||||||||||||||||
20% | 60% | 50.3% | 57.6% | 75.8% | 90.5% | 97.5% | ||||||||||||||||||||
10% | 30% | 29.3% | 39.6% | 65.6% | 86.5% | 96.4% | ||||||||||||||||||||
0% | 0% | 3.0% | 17.1% | 52.8% | 81.5% | 95.0% | ||||||||||||||||||||
10% | 30% | 29.2% | 10.3% | 37.1% | 75.4% | 93.4% | ||||||||||||||||||||
20% | 60% | 67.7% | 43.3% | 18.4% | 68.0% | 91.4% | ||||||||||||||||||||
30% | 90% | 113.2% | 82.1% | 3.8% | 59.4% | 89.1% | ||||||||||||||||||||
40% | 120% | 166.3% | 127.5% | 29.6% | 49.2% | 86.3% | ||||||||||||||||||||
50% | 150% | 227.5% | 179.8% | 59.4% | 37.6% | 83.2% | ||||||||||||||||||||
60% | 180% | 297.5% | 239.6% | 93.5% | 24.2% | 79.6% |
The Indexs annualized historical volatility rate for the five-year period from May 30, 2008 through May 31, 2013 is 24.55%. The Indexs highest volatility rate for any one calendar year during the five-year period is 41.17% and volatility for a shorter period of time may have been substantially higher. The Indexs annualized performance for the five-year period from May 30, 2008 through May 31, 2013 is 4.40%. Historical Index volatility and performance are not indications of what the Index volatility and performance will be in the future.
For additional graphs and charts demonstrating the effects of volatility and index performance on the long-term performance of the Fund, see Additional Information Regarding Investment Techniques and Policies and Negative Implications of Daily Goals in Volatile Markets in the Funds statutory prospectus, and Special Note Regarding the Correlation Risks of the Funds in the Funds Statement of Additional Information.
Holding an unmanaged position opens the investor to the risk of market volatility adversely affecting the performance of the investment. The Fund is not appropriate for investors who do not intend to actively monitor and manage their portfolios. This table is intended to underscore the fact that the Fund is designed as a short-term trading vehicle for investors who intend to actively monitor and manage their portfolios.
To fully understand the risks of market volatility on the Fund, see Negative Implications of Daily Goals in Volatile Markets found in the statutory prospectus.
Emerging Markets Risk
Indirectly investing in emerging markets instruments involve greater risks than indirectly investing in foreign instruments in general. Risks of investing in emerging market countries include: political or social upheaval; nationalization of businesses; restrictions on foreign ownership; prohibitions on the repatriation of assets; and risks from an economys dependence on revenues from particular commodities or industries. In addition, currency transfer restrictions, limited potential buyers for such instruments, delays and disruption in settlement procedures and illiquidity or low volumes of transactions may make exits difficult or impossible at times.
Equity Securities Risk
Investments in publicly issued equity securities and securities that provide exposure to equity securities, including common stocks, in general are subject to market risks that may cause their prices to fluctuate over time. Fluctuations in the value of equity securities in which the Fund invests will cause the NAV of the Fund to fluctuate.
Financial Services Companies Risk
The Fund currently focuses its investments in securities issued by, and/or has exposure to, financial services companies. As a result, the Fund is subject to risks of legislative or regulatory changes, adverse market conditions and/or increased competition affecting the financial services companies. Profitability is largely dependent on the availability and cost of capital, and can fluctuate significantly when interest rates change. Credit losses resulting from financial difficulties of borrowers also can negatively impact the sector.
Foreign Securities Risk
Indirectly investing in foreign instruments may involve greater risks than investing in domestic instruments. As a result, the Funds returns and NAVs may be affected to a large degree by fluctuations in currency exchange rates, interest rates, political, diplomatic or economic conditions and regulatory requirements in other countries. The laws and accounting, auditing, and financial reporting standards in foreign countries typically are not as strict as they are in the U.S., and there may be less public information available about foreign companies.
Gain Limitation Risk
If the Funds benchmark moves more than 33% on a given trading day in a direction adverse to the Fund, you would lose all of your money. Rafferty will attempt to position the Funds portfolio to ensure that the Fund does not lose more than 90% of its NAV on a given day. The cost of such downside protection will be limitations on the Funds gains. As a consequence, the Funds portfolio may not be responsive to Index gains beyond 30% in a given day. For example, if the Index were to gain 35%, the Fund might be limited to a daily gain of 90% rather than 105%, which is 300% of the Index gain of 35%.
DIREXION SHARES ETF TRUST PROSPECTUS | 21 |
Geographic Concentration Risk
Investments in a particular country or geographic region may be particularly susceptible to political, diplomatic or economic conditions and regulatory requirements. As a result, the Fund may be more volatile than a more geographically diversified fund.
High Portfolio Turnover Risk
Daily rebalancing of the Funds holdings pursuant to its daily investment objective causes a much greater number of portfolio transactions when compared to most exchange-traded funds. Such frequent and active trading leads to significantly higher transaction costs because of increased broker commissions resulting from such transactions. In addition, there is the possibility of significantly increased capital gains, including short-term and/or long-term capital gains that will be taxable to shareholders as ordinary income. The Fund calculates portfolio turnover without including the short term cash instruments or derivative transactions that comprise the majority of the Funds trading. As such, if the Funds extensive use of derivative instruments were reflected, the calculated portfolio turnover rate would be significantly higher.
Hong Kong Securities Risk
Investment in securities of Hong Kong issuers involves risks that may be greater than if the Funds investments were more geographically diverse. Hong Kongs reversion to China has been marked by increased volatility and uncertainty in its economic and political status, which may result in adverse affects for the Funds investments. Hong Kongs economy has become more dependent on Chinas role in the global market and the strength or diminishment of that relationship may impact Hong Kong issuers. Additionally, because Hong Kong has few natural resources, any surplus or shortage in the commodity markets could impact the Hong Kong economy as a whole.
Intra-Day Investment Risk
The Fund seeks leveraged investment results from the close of the market on a given trading day until the close of the market on the subsequent trading day. The exact exposure of an investment in the Fund intraday in the secondary market is a function of the difference between the value of the Index at the market close on the first trading day and the value of the Index at the time of purchase. If the Index gains value, the Funds net assets will rise by the same amount as the Funds exposure. Conversely, if the Index declines, the Funds net assets will decline by the same amount as the Funds exposure. Since a Fund starts each trading day with exposure which is 300% of its net assets, a change in both the exposure and the net assets of the Fund by the same absolute amount results in a change in the comparative relationship of the two. As an example (using simplified numbers), if the Fund had $100 in net assets at the market close, it would seek $300 of exposure to the next trading days Index performance. If the Index rose by 1% by noon the following trading day, the exposure of the Fund will have risen by 1% to $303 and the net assets will have risen by that $3 gain to $103. With net assets of $103 and exposure of $303, a purchaser at that point would be receiving 294% exposure of her investment instead of 300%.
Leverage Risk
If you invest in the Fund, you are exposed to the risk that a decline in the daily performance of the Index will be leveraged. This means that your investment in the Fund will be reduced by an amount equal to 3% for every 1% daily decline, not including the cost of financing the portfolio and the impact of operating expenses, which would further lower your investment. The Fund could theoretically lose an amount greater than its net assets in the event of an Index decline of more than 33%. Further, purchasing shares during a day may result in greater than 300% exposure to the performance of the Index if the Index declines between the close of the markets on one trading day and before the close of the markets on the next trading day.
To fully understand the risks of using leverage in the Fund, see Effects of Compounding and Market Volatility Risk above.
Liquidity Risk
Some securities held by the Fund, including derivatives, may be difficult to sell or illiquid, particularly during times of market turmoil. Illiquid securities also may be difficult to value. If the Fund is forced to sell an illiquid security at an unfavorable time or at a price that is lower than Raffertys judgment of the securitys true market value, the Fund may be forced to sell the security at a loss. Such a situation may prevent the Fund from limiting losses, realizing gains or achieving a high correlation with the Index.
Market Risk
The Fund is subject to market risks that can affect the value of its shares. These risks include political, regulatory, market and economic developments, including developments that impact specific economic sectors, industries or segments of the market.
Market Timing Risk
Rafferty expects a significant portion of the assets of the Fund to come from professional money managers and investors who use the Funds as part of asset allocation
22 | DIREXION SHARES ETF TRUST PROSPECTUS |
and market timing investment strategies. These strategies often call for frequent trading which may lead to increased portfolio turnover, higher transaction costs, and the possibility of increased capital gains, including short-term and/or long-term capital gain that will be taxable to shareholders as ordinary income.
Mid Capitalization Company Risk
Investing in the securities of mid capitalization companies, and securities that provide exposure to mid capitalization companies, involves greater risks and the possibility of greater price volatility than investing in more-established, larger capitalization companies. Mid capitalization companies often have narrower markets for their goods and/or services and more limited managerial and financial resources than larger, more established companies. Furthermore, those companies often have limited product lines, services, markets, financial resources or are dependent on a small management group. In addition, because these stocks are not well-known to the investing public, do not have significant institutional ownership and are followed by relatively few security analysts, there will normally be less publicly available information concerning these securities compared to what is available for the securities of larger companies. Adverse publicity and investor perceptions, whether based on fundamental analysis, can decrease the value and liquidity of securities held by the Fund. As a result, their performance can be more volatile and they face greater risk of business failure, which could increase the volatility of the Funds portfolio.
Non-Diversification Risk
The Fund is non-diversified, which means it invests a high percentage of its assets in a limited number of securities. A non-diversified funds NAV and total return may fluctuate more or fall greater in times of weaker markets than a conventional diversified fund.
Regulatory Risk
The Fund is subject to the risk that a change in U.S. law and related regulations will impact the way the Fund operates, increase the particular costs of the Funds operations and/or change the competitive landscape.
Risks of Investing in Other Investment Companies (including ETFs)
Investments in the securities of other investment companies, including ETFs, may involve duplication of advisory fees and certain other expenses. Fund shareholders indirectly bear the Funds proportionate share of the fees and expenses indirectly paid by shareholders of the other investment company or ETF, in addition to the fees and expenses Fund shareholders bear in connection with the Funds own operations. The Funds performance may be magnified positively or negatively by virtue of its investment in other investment companies. If the investment company or ETF fails to achieve its investment objective, the value of the Funds investment will decline, adversely affecting the Funds performance. In addition, closed end investment company and ETF shares potentially may trade at a discount or a premium and are subject to brokerage and other trading costs, which could result in greater expenses to the Fund. Finally, because the value of ETF shares depends on the demand in the market, the Adviser may not be able to liquidate the Funds holdings in those shares at the most optimal time, adversely affecting the Funds performance.
Tax and Distribution Risk
The Fund has extremely high portfolio turnover which causes the Fund to generate significant amounts of taxable income. This income is typically short-term capital gain, which is generally treated as ordinary income when distributed to shareholders, or short-term capital loss. The Fund rarely generates long-term capital gain or loss. The Fund will generally need to distribute net short-term capital gain to satisfy certain tax requirements. As a result of the Funds high portfolio turnover, the Fund could make larger and/or more frequent distributions than traditional unleveraged ETFs. Because the Funds asset level changes frequently, these distributions could comprise a substantial portion or even all of the Funds net assets if the Fund distributes this income after a decline in its net assets. In addition, the Fund may be held by short-term investors and these investors may exit the Fund prior to the record date of a distribution. As a result, shareholders in the Fund on the day of a distribution may receive substantial distributions, which could lead to negative tax implications for such shareholders. Potential investors are urged to consult their own tax advisers for more detailed information.
Rules governing the federal income tax aspects of certain derivatives, including total return equity swaps, real estate-related swaps, credit default swaps and other credit derivatives are not entirely clear. Because the Funds status as a regulated investment company might be affected if the Internal Revenue Service did not accept the Funds treatment of certain transactions involving derivatives, the Funds ability to engage in these transactions may be limited.
Tracking Error Risk
The Fund may have difficulty achieving its daily target due to fees and expenses, high portfolio turnover, transaction costs, and/or a temporary lack of liquidity in the markets for the securities held by the Fund. A failure to achieve a daily target may cause the Fund to provide returns for a longer period that are worse than expected. In addition, even
DIREXION SHARES ETF TRUST PROSPECTUS | 23 |
though the Fund may meet its daily target for a period of time, this will not necessarily produce the returns that might be expected in light of the returns of the Index or the Funds benchmark for that period.
Valuation Time Risk
The Fund values its portfolio as of the close of regular trading on the New York Stock Exchange (NYSE) (generally 4:00 P.M. Eastern time). In some cases, foreign market indices close before the NYSE opens or may not be open for business on the same calendar days as the Fund. As a result, the daily performance of the Fund can vary from the performance of the Index.
Special Risks of Exchange-Traded Funds
Not Individually Redeemable. Shares are not individually redeemable and may be redeemed by the Fund at NAV only in large blocks known as Creation Units. You may incur brokerage costs purchasing enough Shares to constitute a Creation Unit.
Trading Issues. Trading in Shares on an exchange may be halted due to market conditions or for reasons that, in the view of that exchange, make trading in Shares inadvisable, such as extraordinary market volatility or other reasons. There can be no assurance that Shares will continue to meet the listing requirements of the exchange on which it trades, and the listing requirements may be amended from time to time.
Market Price Variance Risk. Individual Shares of the Fund that are listed for trading on an exchange can be bought and sold in the secondary market at market prices. The market prices of Shares will fluctuate in response to changes in NAV and supply and demand for Shares. The Adviser cannot predict whether Shares will trade above, below or at their NAV. Differences between secondary market prices and NAV for Shares may be due largely to supply and demand forces in the secondary market, which forces may not be the same as those influencing prices for securities or instruments held by the Fund at a particular time. Given the fact that Shares can be created and redeemed in Creation Units, the Adviser believes that large discounts or premiums to the NAV of Shares should not be sustained. There may, however, be times when the market price and the NAV vary significantly and you may pay more than NAV when buying Shares on the secondary market, and you may receive less than NAV when you sell those Shares. The market price of Shares, like the price of any exchange-traded security, includes a bid-ask spread charged by the exchange specialists, market makers or other participants that trade the particular security. In times of severe market disruption, the bid-ask spread often increases significantly. This means that Shares may trade at a discount to NAV and the discount is likely to be greatest when the price of Shares is falling fastest, which may be the time that you most want to sell your Shares. The Funds investment results are measured based upon the daily NAV of the Fund over a period of time. Investors purchasing and selling Shares in the secondary market may not experience investment results consistent with those experienced by those creating and redeeming directly with the Fund. There is no guarantee that an active secondary market will develop for Shares of the Fund.
Fund Performance
The Fund has not yet commenced operations; therefore, performance information is not yet available. In the future, performance information for the Fund will be presented in this section. Performance information also will be available on the Funds website at http://www.direxionfunds.com/products?presets=etfs&activetab=performance or by calling the Fund toll free at 1-866-476-7523.
Management
Investment Adviser
Rafferty Asset Management, LLC is the Funds investment adviser.
Portfolio Manager
Paul Brigandi, the Funds Portfolio Manager, is primarily responsible for the day-to-day management of the Fund and has served in this role since the Funds inception.
Purchase and Sale of Fund Shares
The Fund will issue and redeem Shares only to Authorized Participants (typically, broker-dealers) in exchange for the deposit or delivery of a basket of assets (securities and/or cash) in large blocks, known as Creation Units, each of which is comprised of 50,000 Shares. Retail investors may only purchase and sell Fund Shares on a national securities exchange through a broker-dealer. Because the Shares trade at market prices rather than NAV, Shares may trade at a price greater than NAV (premium) or less than NAV (discount).
Tax Information
The Fund intends to make distributions that may be taxed as ordinary income or long-term capital gains. Those distributions will be subject to federal income taxes and may also be subject to state and local taxes. Distributions by the Fund may be significantly higher than those of most exchange-traded funds.
Payments to Broker-Dealers and Other Financial Intermediaries
If you purchase the Fund through a broker-dealer or other financial intermediary (such as a bank or financial advisor), the Fund and/or the Adviser may pay the intermediary for the sale of Fund shares and related services. These payments may create a conflict of interest by influencing the broker-dealer or other financial intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your financial intermediarys website for more information.
24 | DIREXION SHARES ETF TRUST PROSPECTUS |
Direxion Daily Hong Kong Bear 3X Shares
Important Information Regarding the Fund
The Direxion Daily Hong Kong Bear 3X Shares (Fund) seeks daily leveraged investment results. The pursuit of daily leveraged goals means that the Fund is riskier than alternatives that do not use leverage because the Funds objective is to magnify the performance of an index. The pursuit of daily leveraged investment goals means that the return of the Fund for a period longer than a full trading day may bear no resemblance to 300% of the return of its index for such longer period because the aggregate return of the Fund is the product of the series of daily leveraged returns for each trading day. The path of the benchmark during the longer period may be at least as important to the Funds return for the longer period as the cumulative return of the benchmark for the relevant longer period, especially in periods of market volatility. Further, the return for investors that invest for periods less than a full trading day or for a period different than a trading day will not be the product of the return of the Funds stated goal and the performance of the target index for the full trading day.
Investment Objective
The Fund seeks daily investment results, before fees and expenses, of 300% of the inverse (or opposite) of the performance of the MSCI Hong Kong Index. The Fund seeks daily leveraged investment results and does not seek to achieve its stated investment objective over a period of time greater than one day. The Fund is different and much riskier than most exchange-traded funds.
The Fund is designed to be utilized only by knowledgeable investors who understand the potential consequences of seeking daily leveraged investment results, understand the risks associated with shorting and the use of leverage, and are willing to monitor their portfolios frequently. The Fund seeks daily leveraged investment results relative to the Index and is different and riskier than similarly benchmarked exchange-traded funds that do not use leverage. Therefore, the Fund is not intended to be used by, and is not appropriate for, investors who do not intend to actively monitor and manage their portfolios.
Fees and Expenses of the Fund
This table describes the fees and expenses that you may pay if you buy or hold shares of the Fund (Shares). Investors purchasing shares in the secondary market may pay costs (including customary brokerage commissions) charged by their broker.
Annual Fund Operating Expenses (1) (expenses that you pay each year as a percentage of the value of your investment)
Management Fees |
0.75% | |||
Distribution and/or Service (12b-1) Fees |
0.00% | |||
Other Expenses of the Fund |
0.25% | |||
Acquired Fund Fees and Expenses |
0.13% | |||
|
|
|||
Total Annual Fund Operating Expenses |
1.13% | |||
Expense Cap/Reimbursement |
(0.05% | ) | ||
|
|
|||
Total Annual Fund Operating Expenses After Expense Cap/Reimbursement |
1.08% | |||
|
|
(1) |
The Funds adviser, Rafferty Asset Management, LLC (Rafferty or the Adviser) has contractually agreed to cap all or a portion of its management fee and/or reimburse the Fund for Other Expenses through March 1, 2015, to the extent that the Funds Total Annual Operating Expenses exceed 0.95% (excluding, as applicable, among other expenses, taxes, leverage interest, Acquired Fund Fees and Expenses, dividends or interest on short positions, other interest expenses, brokerage commissions, expenses incurred in connection with any merger or reorganization and extraordinary expenses such as litigation). Any expense cap is subject to reimbursement by the Fund within the following three years only if overall expenses fall below these percentage limitations. This agreement may be terminated or revised at any time with the consent of the Board of Trustees. |
Expense Example
This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund for the time periods indicated and then redeem all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Funds operating expenses remain the same. Although your actual costs may be higher or lower, based on these assumptions your costs would be:
1 Year | 3 Years | |
|
||
$110 | $354 |
Portfolio Turnover
The Fund pays transaction costs, such as commissions, when it buys and sells securities (or turns over its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in a taxable account. These costs, which are not reflected in Annual Fund Operating Expenses or in the example, affect the Funds performance.
DIREXION SHARES ETF TRUST PROSPECTUS | 25 |
Principal Investment Strategies
The Fund, under normal circumstances, creates short positions by investing at least 80% of its assets in: futures contracts; options on securities, indices and futures contracts; equity caps, floors and collars; swap agreements; forward contracts; short positions; reverse repurchase agreements; exchange-traded funds (ETFs); and other financial instruments that, in combination, provide leveraged and unleveraged exposure to the MSCI Hong Kong Index (Index). The Fund invests the remainder of its assets in short-term debt instruments that have terms-to-maturity of less than 397 days and exhibit high quality credit profiles, including U.S. government securities and repurchase agreements. The Fund does not invest in equity securities.
Hong Kong is considered an emerging market, as that term is defined by the index provider. The determination that Hong Kong is an emerging market is based on it being an economy that is in the initial stages of industrialization and has been historically marked by low per capita income and lack of capital market transparency, but appears to be implementing political and/or market reforms resulting in greater capital market transparency, increased access for foreign investors and generally improved economic conditions. Emerging markets have the potential for significantly higher or lower rates of return and carry greater risks than more developed economies.
The Index is designed to measure the performance of the large and mid cap segments of the Hong Kong equity market, covering approximately 85% of the free float-adjusted market capitalization in Hong Kong. As of the date of its last reconstitution, the Index had a total dollar value of approximately $662.8 billion, composed of 41 constituent securities ranging in market capitalization from approximately $2.9 billion to $207.3 billion. Additionally, as of May 31, 2013, the Index is concentrated in the financial sector, but this concentration may change in the future based on the Indexs methodology and the varying nature of Hong Kongs economy.
The Fund may gain exposure to only a representative sample of the securities in the Index that have aggregate characteristics similar to those of the Index. The Fund gains this exposure by investing in a combination of financial instruments that, in combination, provide exposure to the underlying securities of the Index. The Fund seeks to remain fully invested at all times consistent with its stated goal. At the close of the markets each trading day, Rafferty positions the Funds portfolio so that its exposure to the Index is consistent with the Funds investment objective. The impact of the Indexs movements during the day will affect whether the Funds portfolio needs to be re-positioned. For example, if the Index has fallen on a given day, net assets of the Fund should rise, meaning that the Funds exposure will need to be increased. Conversely, if the Index has risen on a given day, net assets of the Fund should fall, meaning the Funds exposure will need to be reduced. This re-positioning strategy typically results in high portfolio turnover.
Because of daily rebalancing and the compounding of each days return over time, the return of the Fund for periods longer than a single day will be the result of each days returns compounded over the period, which will very likely differ from 300% of the return of the Index over the same period. The Fund will lose money if the Index performance is flat over time, and as a result of daily rebalancing, the Indexs volatility and the effects of compounding, it is even possible that the Fund will lose money over time while the Indexs performance decreases.
Additionally, because a significant portion of the assets of the Fund may come from investors using asset allocation and market timing investment strategies, the Fund may further need to engage in frequent trading. The Fund will concentrate its investment in a particular industry or group of industries to approximately the same extent as the Index is so concentrated.
Principal Risks
An investment in the Fund entails risk. The Fund could lose money or its performance could trail that of other investment alternatives. The Adviser cannot guarantee that the Fund will achieve its objective. In addition, the Fund presents some risks not traditionally associated with most mutual funds and exchange-traded funds. It is important that investors closely review all of the risks listed below and understand how these risks interrelate before making an investment in the Fund. Turbulence in financial markets and reduced liquidity in equity, credit and fixed income markets could negatively affect issuers worldwide, including the Fund. There is the risk that you could lose all or a portion of your money invested in the Fund.
Adverse Market Conditions Risk
Because the Fund magnifies the inverse performance of the Index, its performance will suffer during conditions in which the Index rises.
Advisers Investment Strategy Risk
The Adviser utilizes a quantitative methodology to select investments for the Fund. Although this methodology is designed to correlate the Funds performance with the performance of the Index, there is no assurance that such methodology will be successful and will enable the Fund to achieve its investment objective.
Cash Transaction Risk
Unlike most ETFs, the Fund currently intends to effect creations and redemptions principally for cash, rather than principally for in-kind securities, because of the nature of the financial instruments held by the Fund. As such, investments in Shares may be less tax efficient than investments in conventional ETFs.
26 | DIREXION SHARES ETF TRUST PROSPECTUS |
Concentration Risk
The Index is concentrated in the financial sector, however, in the future, the Index concentration may change. The Fund will concentrate its investments in a particular industry or group of industries to approximately the same extent as the Index is so concentrated. The performance of the Fund may be more volatile than a fund that does not concentrate its investments in a specific industry or group of industries. The Fund also may be more susceptible to any single economic market, political or regulatory occurrence affecting that industry or group of industries. However, the Fund only may concentrate its investments ( i.e. , hold 25% or more of its total assets in the stocks of a particular industry or group of industries) to approximately the same extent that its underlying index concentrates in the stocks of a particular industry or group of industries. For purposes of this limitation, securities of the U.S. Government (including its agencies and instrumentalities), repurchase agreements collateralized by U.S. Government securities, and securities of state or municipal governments and their political subdivisions are not considered to be issued by members of any industry.
Counterparty Risk
The Fund may invest in financial instruments involving counterparties for the purpose of attempting to gain exposure to a particular group of securities or an asset class without actually purchasing those securities or investments, or to hedge a position. These financial instruments may include swap agreements. The use of swap agreements and other counterparty instruments involves risks that are different from those associated with ordinary portfolio securities transactions. For example, the Fund bears the risk of loss of the amount expected to be received under a swap agreement in the event of the default or bankruptcy of a swap agreement counterparty. Swap agreements and other counterparty instruments also may be considered to be illiquid. In addition, the Fund may enter into swap agreements that involve a limited number of counterparties, which may increase the Funds exposure to counterparty credit risk. The Fund does not specifically limit its counterparty risk with respect to any single counterparty. Further, there is a risk that no suitable counterparties will be willing to enter into, or continue to enter into, transactions with the Fund and, as a result, the Fund may not be able to achieve its investment objective.
Currency Exchange Rate Risk
Changes in foreign currency exchange rates will affect the value of what the Fund owns and the Funds share price. Generally, when the U.S. dollar rises in value against a foreign currency, an investment in that country loses value because that currency is worth fewer U.S. dollars. Devaluation of a currency by a countrys government or banking authority also will have a significant impact on the value of any investments denominated in that currency. Currency markets generally are not as regulated as securities markets.
Daily Correlation Risk
There is no guarantee that the Fund will achieve a high degree of correlation to the Index and therefore achieve its daily investment objective. To achieve a high degree of correlation with the Index, the Fund seeks to rebalance its portfolio daily to keep leverage consistent with its daily target. The Fund may have difficulty achieving its daily target due to fees and expenses, high portfolio turnover, transaction costs and costs associated with the use of leveraged investment techniques and/or a temporary lack of liquidity in the markets for the securities held by the Fund. Market disruptions, regulatory restrictions or extreme volatility will also adversely affect the Funds ability to adjust exposure to the required levels. The Fund may not have investment exposure to all securities in its underlying Index, or its weighting of investment exposure to such stocks or industries may be different from that of the Index. In addition, the Fund may invest in securities or financial instruments not included in the underlying Index. The Fund may be subject to large movements of assets into and out of the Fund, potentially resulting in the Fund being over- or under-exposed to its Index. In addition, the target amount of portfolio exposure to the Index is impacted dynamically by the Indexs movement. Because of this, it is unlikely that the Fund will be perfectly exposed to the Index at the end of each day. The possibility of the Fund being materially over- or under-exposed to its Index increases on days when the Index is volatile near the close of the trading day. Activities surrounding annual index reconstitutions and other index rebalancing or reconstitution events may hinder the Funds ability to meet its daily investment objective on that day.
Derivatives Risk
The Fund uses investment techniques, including investments in derivatives such as futures and forward contracts, options and swaps, which may be considered aggressive. Investments in such derivatives are subject to market risks that may cause their prices to fluctuate over time and may increase the volatility of the Fund. The use of derivatives may expose the Fund to additional risks that it would not be subject to if it invested directly in the securities underlying those derivatives, such as counterparty risk and the risk that the derivatives may become illiquid. The use of derivatives may result in larger losses or smaller gains than otherwise would be the case. Additionally, with respect to the use of swap agreements, if the Index has a dramatic intraday move in value that causes a material decline in the Funds net asset value (NAV), the terms of the swap agreement
DIREXION SHARES ETF TRUST PROSPECTUS | 27 |
between the Fund and its counterparty may allow the counterparty to immediately close out of the transaction with the Fund. In such circumstances, the Fund may be unable to enter into another swap agreement or invest in other derivatives to achieve the desired exposure consistent with the Funds daily investment objective. This may prevent the Fund from achieving its daily investment objective particularly if the Index reverses all or a portion of its intraday move by the end of the day. In addition, the Funds investments in derivatives, as of the date of this Prospectus, are subject to the following risks:
Futures and Forward Contracts . There may be an imperfect correlation between the changes in market value of the securities held by the Fund and the prices of futures contracts. There may not be a liquid secondary market for the futures contracts. Forward currency transactions include the risks associated with fluctuations in currency.
Options . There may be an imperfect correlation between the prices of options and movements in the price of the securities (or indices) hedged or used for cover, which may cause a given hedge not to achieve its objective.
Swap Agreements . Interest rate swaps are subject to interest rate and credit risk. Total return swaps are subject to counterparty risk, which relates to credit risk of the counterparty and liquidity risk of the swaps themselves.
Early Close/Trading Halt Risk
An exchange or market may close or issue trading halts on specific securities, or the ability to buy or sell certain securities or financial instruments may be restricted, which may result in the Fund being unable to buy or sell certain securities or financial instruments. In such circumstances, the Fund may be unable to rebalance its portfolio, may be unable to accurately price its investments and/or may incur substantial trading losses.
Effects of Compounding and Market Volatility Risk
The Fund does not attempt to, and should not be expected to, provide returns which are a multiple of the return of the Index for periods other than a single day. The Fund rebalances its portfolio on a daily basis, increasing exposure in response to that days gains or reducing exposure in response to that days losses. This means that for a period longer than one day, the pursuit of daily goals may result in daily leveraged compounding. It also means that the return of an index over a period of time greater than one day multiplied by the Funds daily target (300%) generally will not equal the Funds performance over that same period.
As a result, over time, the cumulative percentage increase or decrease in the value of the Funds portfolio may diverge significantly from the cumulative percentage increase or decrease in the multiple of the return of the Funds underlying index due to the compounding effect of losses and gains on the returns of the Fund. It also is expected that the Funds use of leverage will cause the Fund to underperform the return of three times its benchmark in a trendless or flat market.
The effect of compounding becomes more pronounced on the Funds performance as the Index experiences volatility. The Indexs volatility rate is a statistical measure of the magnitude of fluctuations in the returns of the Index. The table below provides examples of how Index volatility could affect the Funds performance. The chart shows estimated Fund returns for a number of combinations of performance and volatility over a one-year period and is shown to illustrate how holding the Fund for a period longer than one day may negatively impact investment return. As shown below, this Fund, or any other 3X Bear Fund, would be expected to lose 31.3% (as shown in Table 1 below) if its Index provided no return over a one year period during which the Index experienced annualized volatility of 25%. If the Indexs annualized volatility were to rise to 75%, the hypothetical loss for a one year period for the Fund widens to approximately 96.6%.
At higher ranges of volatility, there is a chance of a near complete loss of value even if the Index is flat. For instance, if the Indexs annualized volatility is 100%, the Fund would be expected to lose approximately 100% of its value, even if the cumulative Index return for the year was only 0%.
Table 1
One
Return |
300%
Return |
Volatility Rate | ||||||||||||||||||||||||
10% | 25% | 50% | 75% | 100% | ||||||||||||||||||||||
60% | 180% | 1371.5% | 973.9% | 248.6% | 46.5% | 96.1% | ||||||||||||||||||||
50% | 150% | 653.4% | 449.8% | 78.5% | 72.6% | 98.0% | ||||||||||||||||||||
40% | 120% | 336.0% | 218.2% | 3.3% | 84.2% | 98.9% | ||||||||||||||||||||
30% | 90% | 174.6% | 100.4% | 34.9% | 90.0% | 99.3% | ||||||||||||||||||||
20% | 60% | 83.9% | 34.2% | 56.4% | 93.3% | 99.5% | ||||||||||||||||||||
10% | 30% | 29.2% | 5.7% | 69.4% | 95.3% | 99.7% | ||||||||||||||||||||
0% | 0% | 5.8% | 31.3% | 77.7% | 96.6% | 99.8% | ||||||||||||||||||||
10% | 30% | 29.2% | 48.4% | 83.2% | 97.4% | 99.8% | ||||||||||||||||||||
20% | 60% | 45.5% | 60.2% | 87.1% | 98.0% | 99.9% | ||||||||||||||||||||
30% | 90% | 57.1% | 68.7% | 89.8% | 98.4% | 99.9% | ||||||||||||||||||||
40% | 120% | 65.7% | 75.0% | 91.9% | 98.8% | 99.9% | ||||||||||||||||||||
50% | 150% | 72.1% | 79.6% | 93.4% | 99.0% | 99.9% | ||||||||||||||||||||
60% | 180% | 77.0% | 83.2% | 94.6% | 99.2% | 99.9% |
28 | DIREXION SHARES ETF TRUST PROSPECTUS |
The Indexs annualized historical volatility rate for the five-year period from May 30, 2008 through May 31, 2013 is 24.55%. The Indexs highest volatility rate for any one calendar year during the five-year period is 41.17% and volatility for a shorter period of time may have been substantially higher. The Indexs annualized performance for the five-year period from May 30, 2008 through May 31, 2013 is 4.40%. Historical Index volatility and performance are not indications of what the Index volatility and performance will be in the future.
For additional graphs and charts demonstrating the effects of volatility and index performance on the long-term performance of the Fund, see Additional Information Regarding Investment Techniques and Policies and Negative Implications of Daily Goals in Volatile Markets in the Funds statutory prospectus, and Special Note Regarding the Correlation Risks of the Funds in the Funds Statement of Additional Information.
Holding an unmanaged position opens the investor to the risk of market volatility adversely affecting the performance of the investment. The Fund is not appropriate for investors who do not intend to actively monitor and manage their portfolios. This table is intended to underscore the fact that the Fund is designed as a short-term trading vehicle for investors who intend to actively monitor and manage their portfolios.
To fully understand the risks of market volatility on the Fund, see Negative Implications of Daily Goals in Volatile Markets found in the statutory prospectus.
Emerging Markets Risk
Indirectly investing in emerging markets instruments involve greater risks than indirectly investing in foreign instruments in general. Risks of investing in emerging market countries include: political or social upheaval; nationalization of businesses; restrictions on foreign ownership; prohibitions on the repatriation of assets; and risks from an economys dependence on revenues from particular commodities or industries. In addition, currency transfer restrictions, limited potential buyers for such instruments, delays and disruption in settlement procedures and illiquidity or low volumes of transactions may make exits difficult or impossible at times.
Financial Services Companies Risk
The Fund currently focuses its investments in securities issued by, and/or has exposure to, financial services companies. As a result, the Fund is subject to risks of legislative or regulatory changes, adverse market conditions and/or increased competition affecting the financial services companies. Profitability is largely dependent on the availability and cost of capital, and can fluctuate significantly when interest rates change. Credit losses resulting from financial difficulties of borrowers also can negatively impact the sector.
Foreign Securities Risk
Indirectly investing in foreign instruments may involve greater risks than investing in domestic instruments. As a result, the Funds returns and NAVs may be affected to a large degree by fluctuations in currency exchange rates, interest rates, political, diplomatic or economic conditions and regulatory requirements in other countries. The laws and accounting, auditing, and financial reporting standards in foreign countries typically are not as strict as they are in the U.S., and there may be less public information available about foreign companies.
Gain Limitation Risk
If the Funds benchmark moves more than 33% on a given trading day in a direction adverse to the Fund, you would lose all of your money. Rafferty will attempt to position the Funds portfolio to ensure that the Fund does not lose more than 90% of its NAV on a given day. The cost of such downside protection will be limitations on the Funds gains. As a consequence, the Funds portfolio may not be responsive to Index losses beyond 30% in a given day. For example, if the Index were to lose 35%, the Fund might be limited to a daily gain of 90% rather than 105%, which is 300% of the Index loss of 35%.
Geographic Concentration Risk
Investments in a particular country or geographic region may be particularly susceptible to political, diplomatic or economic conditions and regulatory requirements. As a result, the Fund may be more volatile than a more geographically diversified fund.
High Portfolio Turnover Risk
Daily rebalancing of the Funds holdings pursuant to its daily investment objective causes a much greater number of portfolio transactions when compared to most exchange-traded funds. Such frequent and active trading leads to significantly higher transaction costs because of increased broker commissions resulting from such transactions. In addition, there is the possibility of significantly increased capital gains, including short-term and/or long-term capital gains that will be taxable to shareholders as ordinary income. The Fund calculates portfolio turnover without including the short term cash instruments or derivative transactions that comprise the majority of the Funds trading. As such, if the Funds extensive use of derivative instruments were reflected, the calculated portfolio turnover rate would be significantly higher.
DIREXION SHARES ETF TRUST PROSPECTUS | 29 |
Hong Kong Securities Risk
Investment in securities of Hong Kong issuers involves risks that may be greater than if the Funds investments were more geographically diverse. Hong Kongs reversion to China has been marked by increased volatility and uncertainty in its economic and political status, which may result in adverse affects for the Funds investments. Hong Kongs economy has become more dependent on Chinas role in the global market and the strength or diminishment of that relationship may impact Hong Kong issuers. Additionally, because Hong Kong has few natural resources, any surplus or shortage in the commodity markets could impact the Hong Kong economy as a whole.
Intra-Day Investment Risk
The Fund seeks leveraged investment results from the close of the market on a given trading day until the close of the market on the subsequent trading day. The exact exposure of an investment in the Fund intraday in the secondary market is a function of the difference between the value of the Index at the market close on the first trading day and the value of the Index at the time of purchase. The Funds gains occur as its market exposure declines and its losses are accompanied by increases in market exposure. If the Index declines, the Funds net assets will rise by an amount equal to the decline in the Funds exposure. Conversely, if the Index rises the Funds net assets will decline by the same amount as the increase in the Funds exposure. As an example (using simplified numbers), if the Fund had $100 in net assets at the market close, it would seek $300 of exposure to the next trading days Index performance. If the Index declined by 1% by noon the following trading day, the exposure of the Fund will fall by 1% to $297 and the net assets will rise by $3 to $103. With net assets of $103 and exposure of $297, a purchaser at that point would be receiving 288% exposure of her investment instead of 300%
Inverse Correlation Risk
Shareholders should lose money when the Index rises, which is a result that is the opposite from traditional funds.
Leverage Risk
If you invest in the Fund, you are exposed to the risk that an increase in the daily performance of the Index will be leveraged. This means that your investment in the Fund will be reduced by an amount equal to 3% for every 1% daily increase, not including the cost of financing the portfolio and the impact of operating expenses, which would further lower your investment. The Fund could theoretically lose an amount greater than its net assets in the event of an Index increase of more than 33%. Further, purchasing shares during a day may result in greater than 300% exposure to the performance of the Index if the Index rises between the close of the markets on one trading day and before the close of the markets on the next trading day.
To fully understand the risks of using leverage in the Fund, see Effects of Compounding and Market Volatility Risk above.
Liquidity Risk
Some securities held by the Fund, including derivatives, may be difficult to sell or illiquid, particularly during times of market turmoil. Illiquid securities also may be difficult to value. If the Fund is forced to sell an illiquid security at an unfavorable time or at a price that is lower than Raffertys judgment of the securitys true market value, the Fund may be forced to sell the security at a loss. Such a situation may prevent the Fund from limiting losses, realizing gains or achieving a high correlation with the Index.
Market Risk
The Fund is subject to market risks that can affect the value of its shares. These risks include political, regulatory, market and economic developments, including developments that impact specific economic sectors, industries or segments of the market.
Market Timing Risk
Rafferty expects a significant portion of the assets of the Fund to come from professional money managers and investors who use the Funds as part of asset allocation and market timing investment strategies. These strategies often call for frequent trading which may lead to increased portfolio turnover, higher transaction costs, and the possibility of increased capital gains, including short-term and/or long-term capital gain that will be taxable to shareholders as ordinary income.
Mid Capitalization Company Risk
Investing in the securities of mid capitalization companies, and securities that provide exposure to mid capitalization companies, involves greater risks and the possibility of greater price volatility than investing in more-established, larger capitalization companies. Mid capitalization companies often have narrower markets for their goods and/or services and more limited managerial and financial resources than larger, more established companies. Furthermore, those companies often have limited product lines, services, markets, financial resources or are dependent on a small management group. In addition, because these stocks are not well-known to the investing public, do not have significant institutional ownership and are followed by relatively few security analysts, there will
30 | DIREXION SHARES ETF TRUST PROSPECTUS |
normally be less publicly available information concerning these securities compared to what is available for the securities of larger companies. Adverse publicity and investor perceptions, whether based on fundamental analysis, can decrease the value and liquidity of securities held by the Fund. As a result, their performance can be more volatile and they face greater risk of business failure, which could increase the volatility of the Funds portfolio.
Non-Diversification Risk
The Fund is non-diversified, which means it invests a high percentage of its assets in a limited number of securities. A non-diversified funds NAV and total return may fluctuate more or fall greater in times of weaker markets than a conventional diversified fund.
Regulatory Risk
The Fund is subject to the risk that a change in U.S. law and related regulations will impact the way the Fund operates, increase the particular costs of the Funds operations and/or change the competitive landscape.
Risks of Investing in Other Investment Companies (including ETFs)
Investments in the securities of other investment companies, including ETFs, may involve duplication of advisory fees and certain other expenses. Fund shareholders indirectly bear the Funds proportionate share of the fees and expenses indirectly paid by shareholders of the other investment company or ETF, in addition to the fees and expenses Fund shareholders bear in connection with the Funds own operations. The Funds performance may be magnified positively or negatively by virtue of its investment in other investment companies. If the investment company or ETF fails to achieve its investment objective, the value of the Funds investment will decline, adversely affecting the Funds performance. In addition, closed end investment company and ETF shares potentially may trade at a discount or a premium and are subject to brokerage and other trading costs, which could result in greater expenses to the Fund. Finally, because the value of ETF shares depends on the demand in the market, the Adviser may not be able to liquidate the Funds holdings in those shares at the most optimal time, adversely affecting the Funds performance.
Shorting Risk
The Fund may engage in short sales designed to earn the Fund a profit from the decline in the price of particular securities, baskets of securities or indices. However, there is a risk that the Fund will experience a loss as a result of engaging in these short sales.
Tax and Distribution Risk
The Fund has extremely high portfolio turnover which causes the Fund to generate significant amounts of taxable income. This income is typically short-term capital gain, which is generally treated as ordinary income when distributed to shareholders, or short-term capital loss. The Fund rarely generates long-term capital gain or loss. The Fund will generally need to distribute net short-term capital gain to satisfy certain tax requirements. As a result of the Funds high portfolio turnover, the Fund could make larger and/or more frequent distributions than traditional unleveraged ETFs. Because the Funds asset level changes frequently, these distributions could comprise a substantial portion or even all of the Funds net assets if the Fund distributes this income after a decline in its net assets. In addition, the Fund may be held by short-term investors and these investors may exit the Fund prior to the record date of a distribution. As a result, shareholders in the Fund on the day of a distribution may receive substantial distributions, which could lead to negative tax implications for such shareholders. Potential investors are urged to consult their own tax advisers for more detailed information.
Rules governing the federal income tax aspects of certain derivatives, including total return equity swaps, real estate-related swaps, credit default swaps and other credit derivatives are not entirely clear. Because the Funds status as a regulated investment company might be affected if the Internal Revenue Service did not accept the Funds treatment of certain transactions involving derivatives, the Funds ability to engage in these transactions may be limited.
Tracking Error Risk
The Fund may have difficulty achieving its daily target due to fees and expenses, high portfolio turnover, transaction costs, and/or a temporary lack of liquidity in the markets for the securities held by the Fund. A failure to achieve a daily target may cause the Fund to provide returns for a longer period that are worse than expected. In addition, even though the Fund may meet its daily target for a period of time, this will not necessarily produce the returns that might be expected in light of the returns of the Index or the Funds benchmark for that period.
Valuation Time Risk
The Fund values its portfolio as of the close of regular trading on the New York Stock Exchange (NYSE) (generally 4:00 P.M. Eastern time). In some cases, foreign market indices close before the NYSE opens or may not be open for business on the same calendar days as the Fund. As a result, the daily performance of the Fund can vary from the performance of the Index.
DIREXION SHARES ETF TRUST PROSPECTUS | 31 |
Special Risks of Exchange-Traded Funds
Not Individually Redeemable. Shares are not individually redeemable and may be redeemed by the Fund at NAV only in large blocks known as Creation Units. You may incur brokerage costs purchasing enough Shares to constitute a Creation Unit.
Trading Issues. Trading in Shares on an exchange may be halted due to market conditions or for reasons that, in the view of that exchange, make trading in Shares inadvisable, such as extraordinary market volatility or other reasons. There can be no assurance that Shares will continue to meet the listing requirements of the exchange on which it trades, and the listing requirements may be amended from time to time.
Market Price Variance Risk. Individual Shares of the Fund that are listed for trading on an exchange can be bought and sold in the secondary market at market prices. The market prices of Shares will fluctuate in response to changes in NAV and supply and demand for Shares. The Adviser cannot predict whether Shares will trade above, below or at their NAV. Differences between secondary market prices and NAV for Shares may be due largely to supply and demand forces in the secondary market, which forces may not be the same as those influencing prices for securities or instruments held by the Fund at a particular time. Given the fact that Shares can be created and redeemed in Creation Units, the Adviser believes that large discounts or premiums to the NAV of Shares should not be sustained. There may, however, be times when the market price and the NAV vary significantly and you may pay more than NAV when buying Shares on the secondary market, and you may receive less than NAV when you sell those Shares. The market price of Shares, like the price of any exchange-traded security, includes a bid-ask spread charged by the exchange specialists, market makers or other participants that trade the particular security. In times of severe market disruption, the bid-ask spread often increases significantly. This means that Shares may trade at a discount to NAV and the discount is likely to be greatest when the price of Shares is falling fastest, which may be the time that you most want to sell your Shares. The Funds investment results are measured based upon the daily NAV of the Fund over a period of time. Investors purchasing and selling Shares in the secondary market may not experience investment results consistent with those experienced by those creating and redeeming directly with the Fund. There is no guarantee that an active secondary market will develop for Shares of the Fund.
Fund Performance
The Fund has not yet commenced operations; therefore, performance information is not yet available. In the future, performance information for the Fund will be presented in this section. Performance information also will be available on the Funds website at http://www.direxionfunds.com/products?presets=etfs&activetab=performance or by calling the Fund toll free at 1-866-476-7523.
Management
Investment Adviser
Rafferty Asset Management, LLC is the Funds investment adviser.
Portfolio Manager
Paul Brigandi, the Funds Portfolio Manager, is primarily responsible for the day-to-day management of the Fund and has served in this role since the Funds inception.
Purchase and Sale of Fund Shares
The Fund will issue and redeem Shares in exchange for cash only to Authorized Participants in large blocks, known as Creation Units, each of which is comprised of 50,000 Shares. Retail investors may only purchase and sell Fund Shares on a national securities exchange through a broker-dealer. Because the Shares trade at market prices rather than NAV, Shares may trade at a price greater than NAV (premium) or less than NAV (discount).
Tax Information
The Fund intends to make distributions that may be taxed as ordinary income or long-term capital gains. Those distributions will be subject to federal income taxes and may also be subject to state and local taxes. Distributions by the Fund may be significantly higher than those of most exchange-traded funds.
Payments to Broker-Dealers and Other Financial Intermediaries
If you purchase the Fund through a broker-dealer or other financial intermediary (such as a bank or financial advisor), the Fund and/or the Adviser may pay the intermediary for the sale of Fund shares and related services. These payments may create a conflict of interest by influencing the broker-dealer or other financial intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your financial intermediarys website for more information.
32 | DIREXION SHARES ETF TRUST PROSPECTUS |
Direxion Daily Japan Bull 3X Shares
Important Information Regarding the Fund
The Direxion Daily Japan Bull 3X Shares (Fund) seeks daily leveraged investment results. The pursuit of daily leveraged goals means that the Fund is riskier than alternatives that do not use leverage because the Funds objective is to magnify the performance of an index. The pursuit of daily leveraged investment goals means that the return of the Fund for a period longer than a full trading day may bear no resemblance to 300% of the return of its index for such longer period because the aggregate return of the Fund is the product of the series of daily leveraged returns for each trading day. The path of the benchmark during the longer period may be at least as important to the Funds return for the longer period as the cumulative return of the benchmark for the relevant longer period, especially in periods of market volatility. Further, the return for investors that invest for periods less than a full trading day or for a period different than a trading day will not be the product of the return of the Funds stated goal and the performance of the target index for the full trading day.
Investment Objective
The Fund seeks daily investment results, before fees and expenses, of 300% of the performance of the MSCI Japan Index. The Fund seeks daily leveraged investment results and does not seek to achieve its stated investment objective over a period of time greater than one day. The Fund is different and much riskier than most exchange-traded funds.
The Fund is designed to be utilized only by knowledgeable investors who understand the potential consequences of seeking daily leveraged investment results, understand the risks associated with the use of leverage and are willing to monitor their portfolios frequently. The Fund seeks daily leveraged investment results relative to the Index and is different and riskier than similarly benchmarked exchange-traded funds that do not use leverage. Therefore, the Fund is not intended to be used by, and is not appropriate for, investors who do not intend to actively monitor and manage their portfolios.
Fees and Expenses of the Fund
This table describes the fees and expenses that you may pay if you buy or hold shares of the Fund (Shares). Investors purchasing shares in the secondary market may pay costs (including customary brokerage commissions) charged by their broker.
Annual Fund Operating Expenses (1) (expenses that you pay each year as a percentage of the value of your investment)
Management Fees |
0.75% | |||
Distribution and/or Service (12b-1) Fees |
0.00% | |||
Other Expenses of the Fund |
0.25% | |||
Acquired Fund Fees and Expenses |
0.13% | |||
|
|
|||
Total Annual Fund Operating Expenses |
1.13% | |||
Expense Cap/Reimbursement |
(0.05% | ) | ||
|
|
|||
Total Annual Fund Operating Expenses After
|
1.08% | |||
|
|
(1) |
The Funds adviser, Rafferty Asset Management, LLC (Rafferty or the Adviser) has contractually agreed to cap all or a portion of its management fee and/or reimburse the Fund for Other Expenses through March 1, 2015, to the extent that the Funds Total Annual Operating Expenses exceed 0.95% (excluding, as applicable, among other expenses, taxes, leverage interest, Acquired Fund Fees and Expenses, dividends or interest on short positions, other interest expenses, brokerage commissions, expenses incurred in connection with any merger or reorganization and extraordinary expenses such as litigation). Any expense cap is subject to reimbursement by the Fund within the following three years only if overall expenses fall below these percentage limitations. This agreement may be terminated or revised at any time with the consent of the Board of Trustees. |
Expense Example
This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund for the time periods indicated and then redeem all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Funds operating expenses remain the same. Although your actual costs may be higher or lower, based on these assumptions your costs would be:
1 Year | 3 Years | |
|
||
$110 | $354 |
Portfolio Turnover
The Fund pays transaction costs, such as commissions, when it buys and sells securities (or turns over its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in a taxable account. These costs, which are not reflected in Annual Fund Operating Expenses or in the example, affect the Funds performance.
DIREXION SHARES ETF TRUST PROSPECTUS | 33 |
Principal Investment Strategies
The Fund, under normal circumstances, creates long positions by investing at least 80% of its assets in the securities that comprise the MSCI Japan Index (Index) and/or financial instruments that provide leveraged and unleveraged exposure to the Index. These financial instruments include: futures contracts; options on securities, indices and futures contracts; equity caps, floors and collars; swap agreements; forward contracts; short positions; reverse repurchase agreements; exchange-traded funds (ETFs); and other financial instruments. On a day-to-day basis, the Fund also may hold short-term debt instruments that have terms-to-maturity of less than 397 days and exhibit high quality credit profiles, including U.S. government securities and repurchase agreements.
The Index is designed to measure the performance of the large and mid cap segments of the Japan equity market, covering approximately 85% of the free float-adjusted market capitalization in Japan. As of the date of its last reconstitution, the Index had a total dollar value of approximately $3.3 trillion, composed of 318 constituent securities ranging in market capitalization from approximately $1.4 billion to $207.3 billion.
The Fund may gain exposure to only a representative sample of the securities in the Index that have aggregate characteristics similar to those of the Index. The Fund gains this exposure either by directly investing in the underlying securities of the Index or by investing in derivatives that provide exposure to those securities. The Fund seeks to remain fully invested at all times consistent with its stated goal. At the close of the markets each trading day, Rafferty positions the Funds portfolio so that its exposure to the Index is consistent with the Funds investment objective. The impact of the Indexs movements during the day will affect whether the Funds portfolio needs to be re-positioned. For example, if the Index has risen on a given day, net assets of the Fund should rise, meaning that the Funds exposure will need to be increased. Conversely, if the Index has fallen on a given day, net assets of the Fund should fall, meaning the Funds exposure will need to be reduced. This re-positioning strategy typically results in high portfolio turnover.
Because of daily rebalancing and the compounding of each days return over time, the return of the Fund for periods longer than a single day will be the result of each days returns compounded over the period, which will very likely differ from 300% of the return of the Index over the same period. The Fund will lose money if the Index performance is flat over time, and as a result of daily rebalancing, the Indexs volatility and the effects of compounding, it is even possible that the Fund will lose money over time while the Indexs performance increases.
Additionally, because a significant portion of the assets of the Fund may come from investors using asset allocation and market timing investment strategies, the Fund may further need to engage in frequent trading. The Fund will concentrate its investment in a particular industry or group of industries to approximately the same extent as the Index is so concentrated.
Principal Risks
An investment in the Fund entails risk. The Fund could lose money or its performance could trail that of other investment alternatives. The Adviser cannot guarantee that the Fund will achieve its objective. In addition, the Fund presents some risks not traditionally associated with most mutual funds and exchange-traded funds. It is important that investors closely review all of the risks listed below and understand how these risks interrelate before making an investment in the Fund. Turbulence in financial markets and reduced liquidity in equity, credit and fixed income markets could negatively affect issuers worldwide, including the Fund. There is the risk that you could lose all or a portion of your money invested in the Fund.
Adverse Market Conditions Risk
Because the Fund magnifies the performance of the Index, its performance will suffer during conditions in which the Index declines.
Advisers Investment Strategy Risk
The Adviser utilizes a quantitative methodology to select investments for the Fund. Although this methodology is designed to correlate the Funds performance with the performance of the Index, there is no assurance that such methodology will be successful and will enable the Fund to achieve its investment objective.
Counterparty Risk
The Fund may invest in financial instruments involving counterparties for the purpose of attempting to gain exposure to a particular group of securities or an asset class without actually purchasing those securities or investments, or to hedge a position. These financial instruments may include swap agreements. The use of swap agreements and other counterparty instruments involves risks that are different from those associated with ordinary portfolio securities transactions. For example, the Fund bears the risk of loss of the amount expected to be received under a swap agreement in the event of the default or bankruptcy of a swap agreement counterparty. Swap agreements and other counterparty instruments also may be considered to be illiquid. In addition, the Fund may enter into swap agreements that involve a limited number of counterparties, which may increase the Funds exposure to counterparty credit risk. The Fund does not specifically limit its
34 | DIREXION SHARES ETF TRUST PROSPECTUS |
counterparty risk with respect to any single counterparty. Further, there is a risk that no suitable counterparties will be willing to enter into, or continue to enter into, transactions with the Fund and, as a result, the Fund may not be able to achieve its investment objective.
Currency Exchange Rate Risk
Changes in foreign currency exchange rates will affect the value of what the Fund owns and the Funds share price. Generally, when the U.S. dollar rises in value against a foreign currency, an investment in that country loses value because that currency is worth fewer U.S. dollars. Devaluation of a currency by a countrys government or banking authority also will have a significant impact on the value of any investments denominated in that currency. Currency markets generally are not as regulated as securities markets.
Daily Correlation Risk
There is no guarantee that the Fund will achieve a high degree of correlation to the Index and therefore achieve its daily investment objective. To achieve a high degree of correlation with the Index, the Fund seeks to rebalance its portfolio daily to keep leverage consistent with its daily target. The Fund may have difficulty achieving its daily target due to fees and expenses, high portfolio turnover, transaction costs and costs associated with the use of leveraged investment techniques and/or a temporary lack of liquidity in the markets for the securities held by the Fund. Market disruptions, regulatory restrictions or extreme volatility will also adversely affect the Funds ability to adjust exposure to the required levels. The Fund may not have investment exposure to all securities in its underlying Index, or its weighting of investment exposure to such stocks or industries may be different from that of the Index. In addition, the Fund may invest in securities or financial instruments not included in the underlying Index. The Fund may be subject to large movements of assets into and out of the Fund, potentially resulting in the Fund being over- or under-exposed to its Index. In addition, the target amount of portfolio exposure to the Index is impacted dynamically by the Indexs movement. Because of this, it is unlikely that the Fund will be perfectly exposed to the Index at the end of each day. The possibility of the Fund being materially over- or under-exposed to its Index increases on days when the Index is volatile near the close of the trading day. Activities surrounding annual index reconstitutions and other index rebalancing or reconstitution events may hinder the Funds ability to meet its daily investment objective on that day.
Depositary Receipt Risk
To the extent the Fund seeks exposure to foreign companies, the Funds investments may be in the form of depositary receipts or other securities convertible into securities of foreign issuers, including American Depositary Receipts (ADRs), European Depositary Receipts (EDRs), and Global Depositary Receipts (GDRs). While the use of ADRs, EDRs and GDRs, which are traded on exchanges and represent and ownership in a foreign security, provide an alternative to directly purchasing the underlying foreign securities in their respective national markets and currencies, investments in ADRs, EDRs, and GDRs continue to be subject to certain of the risks associated with investing directly in foreign securities.
Derivatives Risk
The Fund uses investment techniques, including investments in derivatives such as futures and forward contracts, options and swaps, which may be considered aggressive. Investments in such derivatives are subject to market risks that may cause their prices to fluctuate over time and may increase the volatility of the Fund. The use of derivatives may expose the Fund to additional risks that it would not be subject to if it invested directly in the securities underlying those derivatives, such as counterparty risk and the risk that the derivatives may become illiquid. The use of derivatives may result in larger losses or smaller gains than otherwise would be the case. Additionally, with respect to the use of swap agreements, if the Index has a dramatic intraday move in value that causes a material decline in the Funds net asset value (NAV), the terms of the swap agreement between the Fund and its counterparty may allow the counterparty to immediately close out of the transaction with the Fund. In such circumstances, the Fund may be unable to enter into another swap agreement or invest in other derivatives to achieve the desired exposure consistent with the Funds daily investment objective. This may prevent the Fund from achieving its daily investment objective particularly if the Index reverses all or a portion of its intraday move by the end of the day. In addition, the Funds investments in derivatives, as of the date of this Prospectus, are subject to the following risks:
Futures and Forward Contracts . There may be an imperfect correlation between the changes in market value of the securities held by the Fund and the prices of futures contracts. There may not be a liquid secondary market for the futures contracts. Forward currency transactions include the risks associated with fluctuations in currency.
Options . There may be an imperfect correlation between the prices of options and movements in the price of the securities (or indices) hedged or used for cover, which may cause a given hedge not to achieve its objective.
DIREXION SHARES ETF TRUST PROSPECTUS | 35 |
Swap Agreements . Interest rate swaps are subject to interest rate and credit risk. Total return swaps are subject to counterparty risk, which relates to credit risk of the counterparty and liquidity risk of the swaps themselves.
Early Close/Trading Halt Risk
An exchange or market may close or issue trading halts on specific securities, or the ability to buy or sell certain securities or financial instruments may be restricted, which may result in the Fund being unable to buy or sell certain securities or financial instruments. In such circumstances, the Fund may be unable to rebalance its portfolio, may be unable to accurately price its investments and/or may incur substantial trading losses.
Effects of Compounding and Market Volatility Risk
The Fund does not attempt to, and should not be expected to, provide returns which are a multiple of the return of the Index for periods other than a single day. The Fund rebalances its portfolio on a daily basis, increasing exposure in response to that days gains or reducing exposure in response to that days losses. This means that for a period longer than one day, the pursuit of daily goals may result in daily leveraged compounding. It also means that the return of an index over a period of time greater than one day multiplied by the Funds daily target (300%) generally will not equal the Funds performance over that same period.
As a result, over time, the cumulative percentage increase or decrease in the value of the Funds portfolio may diverge significantly from the cumulative percentage increase or decrease in the multiple of the return of the Funds underlying index due to the compounding effect of losses and gains on the returns of the Fund. It also is expected that the Funds use of leverage will cause the Fund to underperform the return of three times its benchmark in a trendless or flat market.
The effect of compounding becomes more pronounced on the Funds performance as the Index experiences volatility. The Indexs volatility rate is a statistical measure of the magnitude of fluctuations in the returns of the Index. The table below provides examples of how Index volatility could affect the Funds performance. The chart shows estimated Fund returns for a number of combinations of performance and volatility over a one-year period and is shown to illustrate how holding the Fund for a period longer than one day may negatively impact investment return. As shown below, this Fund, or any other 3X Bull Fund, would be expected to lose 17.1% (as shown in Table 1 below) if its Index provided no return over a one year period during which the Index experienced annualized volatility of 25%. If the Indexs annualized volatility were to rise to 75%, the hypothetical loss for a one year period for the Fund widens to approximately 81.5%.
At higher ranges of volatility, there is a chance of a near complete loss of value even if the Index is flat. For instance, if the Indexs annualized volatility is 100%, the Fund would be expected to lose 95% of its value, even if the cumulative Index return for the year was only 0%.
Table 1
One
Year Index Return |
300%
Return |
Volatility Rate | ||||||||||||||||||||||||
10% | 25% | 50% | 75% | 100% | ||||||||||||||||||||||
60% | 180% | 93.8% | 94.7% | 97.0% | 98.8% | 99.7% | ||||||||||||||||||||
50% | 150% | 87.9% | 89.6% | 94.1% | 97.7% | 99.4% | ||||||||||||||||||||
40% | 120% | 79.0% | 82.1% | 89.8% | 96.0% | 98.9% | ||||||||||||||||||||
30% | 90% | 66.7% | 71.6% | 83.8% | 93.7% | 98.3% | ||||||||||||||||||||
20% | 60% | 50.3% | 57.6% | 75.8% | 90.5% | 97.5% | ||||||||||||||||||||
10% | 30% | 29.3% | 39.6% | 65.6% | 86.5% | 96.4% | ||||||||||||||||||||
0% | 0% | 3.0% | 17.1% | 52.8% | 81.5% | 95.0% | ||||||||||||||||||||
10% | 30% | 29.2% | 10.3% | 37.1% | 75.4% | 93.4% | ||||||||||||||||||||
20% | 60% | 67.7% | 43.3% | 18.4% | 68.0% | 91.4% | ||||||||||||||||||||
30% | 90% | 113.2% | 82.1% | 3.8% | 59.4% | 89.1% | ||||||||||||||||||||
40% | 120% | 166.3% | 127.5% | 29.6% | 49.2% | 86.3% | ||||||||||||||||||||
50% | 150% | 227.5% | 179.8% | 59.4% | 37.6% | 83.2% | ||||||||||||||||||||
60% | 180% | 297.5% | 239.6% | 93.5% | 24.2% | 79.6% |
The Indexs annualized historical volatility rate for the five-year period from May 30, 2008 through May 31, 2013 is 24.86%. The Indexs highest volatility rate for any one calendar year during the five-year period is 39.89% and volatility for a shorter period of time may have been substantially higher. The Indexs annualized performance for the five-year period from May 30, 2008 through May 31, 2013 is 1.88%. Historical Index volatility and performance are not indications of what the Index volatility and performance will be in the future.
For additional graphs and charts demonstrating the effects of volatility and index performance on the long-term performance of the Fund, see Additional Information Regarding Investment Techniques and Policies and Negative Implications of Daily Goals in Volatile Markets in the Funds statutory prospectus, and Special Note Regarding the Correlation Risks of the Funds in the Funds Statement of Additional Information.
Holding an unmanaged position opens the investor to the risk of market volatility adversely affecting the performance of the investment. The Fund is not appropriate for investors who do not intend to actively monitor and manage their portfolios. This table is intended to underscore the fact that the Fund is designed as a short-term trading vehicle for investors who intend to actively monitor and manage their portfolios.
To fully understand the risks of market volatility on the Fund, see Negative Implications of Daily Goals in Volatile Markets found in the statutory prospectus.
36 | DIREXION SHARES ETF TRUST PROSPECTUS |
Equity Securities Risk
Investments in publicly issued equity securities and securities that provide exposure to equity securities, including common stocks, in general are subject to market risks that may cause their prices to fluctuate over time. Fluctuations in the value of equity securities in which the Fund invests will cause the NAV of the Fund to fluctuate.
Foreign Securities Risk
Indirectly investing in foreign instruments may involve greater risks than investing in domestic instruments. As a result, the Funds returns and NAVs may be affected to a large degree by fluctuations in currency exchange rates, interest rates, political, diplomatic or economic conditions and regulatory requirements in other countries. The laws and accounting, auditing, and financial reporting standards in foreign countries typically are not as strict as they are in the U.S., and there may be less public information available about foreign companies.
Gain Limitation Risk
If the Funds benchmark moves more than 33% on a given trading day in a direction adverse to the Fund, you would lose all of your money. Rafferty will attempt to position the Funds portfolio to ensure that the Fund does not lose more than 90% of its NAV on a given day. The cost of such downside protection will be limitations on the Funds gains. As a consequence, the Funds portfolio may not be responsive to Index gains beyond 30% in a given day. For example, if the Index were to gain 35%, the Fund might be limited to a daily gain of 90% rather than 105%, which is 300% of the Index gain of 35%.
Geographic Concentration Risk
Investments in a particular country or geographic region may be particularly susceptible to political, diplomatic or economic conditions and regulatory requirements. As a result, the Fund may be more volatile than a more geographically diversified fund.
High Portfolio Turnover Risk
Daily rebalancing of the Funds holdings pursuant to its daily investment objective causes a much greater number of portfolio transactions when compared to most exchange-traded funds. Such frequent and active trading leads to significantly higher transaction costs because of increased broker commissions resulting from such transactions. In addition, there is the possibility of significantly increased capital gains, including short-term and/or long-term capital gains that will be taxable to shareholders as ordinary income. The Fund calculates portfolio turnover without including the short term cash instruments or derivative transactions that comprise the majority of the Funds trading. As such, if the Funds extensive use of derivative instruments were reflected, the calculated portfolio turnover rate would be significantly higher.
Intra-Day Investment Risk
The Fund seeks leveraged investment results from the close of the market on a given trading day until the close of the market on the subsequent trading day. The exact exposure of an investment in the Fund intraday in the secondary market is a function of the difference between the value of the Index at the market close on the first trading day and the value of the Index at the time of purchase. If the Index gains value, the Funds net assets will rise by the same amount as the Funds exposure. Conversely, if the Index declines, the Funds net assets will decline by the same amount as the Funds exposure. Since a Fund starts each trading day with exposure which is 300% of its net assets, a change in both the exposure and the net assets of the Fund by the same absolute amount results in a change in the comparative relationship of the two. As an example (using simplified numbers), if the Fund had $100 in net assets at the market close, it would seek $300 of exposure to the next trading days Index performance. If the Index rose by 1% by noon the following trading day, the exposure of the Fund will have risen by 1% to $303 and the net assets will have risen by that $3 gain to $103. With net assets of $103 and exposure of $303, a purchaser at that point would be receiving 294% exposure of her investment instead of 300%.
Japanese Securities Risk
Investment in securities of Japanese issuers involves risks that may be greater than if the Funds investments were more geographically diverse. The Japanese economy has recently emerged from a prolonged economic downturn. Since 2000, Japans economic growth rate has remained relatively low. Its economy is characterized by government intervention and protectionism, an unstable financial services sector and relatively high unemployment. Japans economy is heavily dependent on international trade and has been adversely affected by trade tariffs and competition from emerging economies. As such, economic growth is heavily dependent on continued growth in international trade, government support of the financial services sector, among other troubled sectors, and consistent government policy. Any changes or trends in these economic factors could have a significant impact on Japans economy overall and may negatively affect the Funds investment. Japans economy is also closely tied to its two largest trading partners, the U.S. and China. Economic volatility in either nation may create volatility for Japans economy as well. Additionally, as China has increased its role with Japan as a trading partner, political tensions between the countries has
DIREXION SHARES ETF TRUST PROSPECTUS | 37 |
become strained. Any increase or decrease in such tension may have consequences for investment in Japanese issuers.
Leverage Risk
If you invest in the Fund, you are exposed to the risk that a decline in the daily performance of the Index will be leveraged. This means that your investment in the Fund will be reduced by an amount equal to 3% for every 1% daily decline, not including the cost of financing the portfolio and the impact of operating expenses, which would further lower your investment. The Fund could theoretically lose an amount greater than its net assets in the event of an Index decline of more than 33%. Further, purchasing shares during a day may result in greater than 300% exposure to the performance of the Index if the Index declines between the close of the markets on one trading day and before the close of the markets on the next trading day.
To fully understand the risks of using leverage in the Fund, see Effects of Compounding and Market Volatility Risk above.
Liquidity Risk
Some securities held by the Fund, including derivatives, may be difficult to sell or illiquid, particularly during times of market turmoil. Illiquid securities also may be difficult to value. If the Fund is forced to sell an illiquid security at an unfavorable time or at a price that is lower than Raffertys judgment of the securitys true market value, the Fund may be forced to sell the security at a loss. Such a situation may prevent the Fund from limiting losses, realizing gains or achieving a high correlation with the Index.
Market Risk
The Fund is subject to market risks that can affect the value of its shares. These risks include political, regulatory, market and economic developments, including developments that impact specific economic sectors, industries or segments of the market.
Market Timing Risk
Rafferty expects a significant portion of the assets of the Fund to come from professional money managers and investors who use the Funds as part of asset allocation and market timing investment strategies. These strategies often call for frequent trading which may lead to increased portfolio turnover, higher transaction costs, and the possibility of increased capital gains, including short-term and/or long-term capital gain that will be taxable to shareholders as ordinary income.
Mid Capitalization Company Risk
Investing in the securities of mid capitalization companies, and securities that provide exposure to mid capitalization companies, involves greater risks and the possibility of greater price volatility than investing in more-established, larger capitalization companies. Mid capitalization companies often have narrower markets for their goods and/or services and more limited managerial and financial resources than larger, more established companies. Furthermore, those companies often have limited product lines, services, markets, financial resources or are dependent on a small management group. In addition, because these stocks are not well-known to the investing public, do not have significant institutional ownership and are followed by relatively few security analysts, there will normally be less publicly available information concerning these securities compared to what is available for the securities of larger companies. Adverse publicity and investor perceptions, whether based on fundamental analysis, can decrease the value and liquidity of securities held by the Fund. As a result, their performance can be more volatile and they face greater risk of business failure, which could increase the volatility of the Funds portfolio.
Non-Diversification Risk
The Fund is non-diversified, which means it invests a high percentage of its assets in a limited number of securities. A non-diversified funds NAV and total return may fluctuate more or fall greater in times of weaker markets than a conventional diversified fund.
Regulatory Risk
The Fund is subject to the risk that a change in U.S. law and related regulations will impact the way the Fund operates, increase the particular costs of the Funds operations and/or change the competitive landscape.
Risks of Investing in Other Investment Companies (including ETFs)
Investments in the securities of other investment companies, including ETFs, may involve duplication of advisory fees and certain other expenses. Fund shareholders indirectly bear the Funds proportionate share of the fees and expenses indirectly paid by shareholders of the other investment company or ETF, in addition to the fees and expenses Fund shareholders bear in connection with the Funds own operations. The Funds performance may be magnified positively or negatively by virtue of its investment in other investment companies. If the investment company or ETF fails to achieve its investment objective, the value of the Funds investment will decline, adversely affecting the Funds performance. In addition, closed end investment
38 | DIREXION SHARES ETF TRUST PROSPECTUS |
company and ETF shares potentially may trade at a discount or a premium and are subject to brokerage and other trading costs, which could result in greater expenses to the Fund. Finally, because the value of ETF shares depends on the demand in the market, the Adviser may not be able to liquidate the Funds holdings in those shares at the most optimal time, adversely affecting the Funds performance.
Tax and Distribution Risk
The Fund has extremely high portfolio turnover which causes the Fund to generate significant amounts of taxable income. This income is typically short-term capital gain, which is generally treated as ordinary income when distributed to shareholders, or short-term capital loss. The Fund rarely generates long-term capital gain or loss. The Fund will generally need to distribute net short-term capital gain to satisfy certain tax requirements. As a result of the Funds high portfolio turnover, the Fund could make larger and/or more frequent distributions than traditional unleveraged ETFs. Because the Funds asset level changes frequently, these distributions could comprise a substantial portion or even all of the Funds net assets if the Fund distributes this income after a decline in its net assets. In addition, the Fund may be held by short-term investors and these investors may exit the Fund prior to the record date of a distribution. As a result, shareholders in the Fund on the day of a distribution may receive substantial distributions, which could lead to negative tax implications for such shareholders. Potential investors are urged to consult their own tax advisers for more detailed information.
Rules governing the federal income tax aspects of certain derivatives, including total return equity swaps, real estate-related swaps, credit default swaps and other credit derivatives are not entirely clear. Because the Funds status as a regulated investment company might be affected if the Internal Revenue Service did not accept the Funds treatment of certain transactions involving derivatives, the Funds ability to engage in these transactions may be limited.
Tracking Error Risk
The Fund may have difficulty achieving its daily target due to fees and expenses, high portfolio turnover, transaction costs, and/or a temporary lack of liquidity in the markets for the securities held by the Fund. A failure to achieve a daily target may cause the Fund to provide returns for a longer period that are worse than expected. In addition, even though the Fund may meet its daily target for a period of time, this will not necessarily produce the returns that might be expected in light of the returns of the Index or the Funds benchmark for that period.
Valuation Time Risk
The Fund values its portfolio as of the close of regular trading on the New York Stock Exchange (NYSE) (generally 4:00 P.M. Eastern time). In some cases, foreign market indices close before the NYSE opens or may not be open for business on the same calendar days as the Fund. As a result, the daily performance of the Fund can vary from the performance of the Index.
Special Risks of Exchange-Traded Funds
Not Individually Redeemable. Shares are not individually redeemable and may be redeemed by the Fund at NAV only in large blocks known as Creation Units. You may incur brokerage costs purchasing enough Shares to constitute a Creation Unit.
Trading Issues. Trading in Shares on an exchange may be halted due to market conditions or for reasons that, in the view of that exchange, make trading in Shares inadvisable, such as extraordinary market volatility or other reasons. There can be no assurance that Shares will continue to meet the listing requirements of the exchange on which it trades, and the listing requirements may be amended from time to time.
Market Price Variance Risk. Individual Shares of the Fund that are listed for trading on an exchange can be bought and sold in the secondary market at market prices. The market prices of Shares will fluctuate in response to changes in NAV and supply and demand for Shares. The Adviser cannot predict whether Shares will trade above, below or at their NAV. Differences between secondary market prices and NAV for Shares may be due largely to supply and demand forces in the secondary market, which forces may not be the same as those influencing prices for securities or instruments held by the Fund at a particular time. Given the fact that Shares can be created and redeemed in Creation Units, the Adviser believes that large discounts or premiums to the NAV of Shares should not be sustained. There may, however, be times when the market price and the NAV vary significantly and you may pay more than NAV when buying Shares on the secondary market, and you may receive less than NAV when you sell those Shares. The market price of Shares, like the price of any exchange-traded security, includes a bid-ask spread charged by the exchange specialists, market makers or other participants that trade the particular security. In times of severe market disruption, the bid-ask spread often increases significantly. This means that Shares may trade at a discount to NAV and the discount is likely to be greatest when the price of Shares is falling fastest, which may be the time that you most want to sell your Shares. The Funds investment results are measured based upon the daily NAV of the Fund over a period of time. Investors purchasing and selling Shares in the secondary market may not experience investment results consistent
DIREXION SHARES ETF TRUST PROSPECTUS | 39 |
with those experienced by those creating and redeeming directly with the Fund. There is no guarantee that an active secondary market will develop for Shares of the Fund.
Fund Performance
The Fund has not yet commenced operations; therefore, performance information is not yet available. In the future, performance information for the Fund will be presented in this section. Performance information also will be available on the Funds website at http://www.direxionfunds.com/products?presets=etfs&activetab=performance or by calling the Fund toll free at 1-866-476-7523.
Management
Investment Adviser
Rafferty Asset Management, LLC is the Funds investment adviser.
Portfolio Manager
Paul Brigandi, the Funds Portfolio Manager, is primarily responsible for the day-to-day management of the Fund and has served in this role since the Funds inception.
Purchase and Sale of Fund Shares
The Fund will issue and redeem Shares only to Authorized Participants (typically, broker-dealers) in exchange for the deposit or delivery of a basket of assets (securities and/or cash) in large blocks, known as Creation Units, each of which is comprised of 50,000 Shares. Retail investors may only purchase and sell Fund Shares on a national securities exchange through a broker-dealer. Because the Shares trade at market prices rather than NAV, Shares may trade at a price greater than NAV (premium) or less than NAV (discount).
Tax Information
The Fund intends to make distributions that may be taxed as ordinary income or long-term capital gains. Those distributions will be subject to federal income taxes and may also be subject to state and local taxes. Distributions by the Fund may be significantly higher than those of most exchange-traded funds.
Payments to Broker-Dealers and Other Financial Intermediaries
If you purchase the Fund through a broker-dealer or other financial intermediary (such as a bank or financial advisor), the Fund and/or the Adviser may pay the intermediary for the sale of Fund shares and related services. These payments may create a conflict of interest by influencing the broker-dealer or other financial intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your financial intermediarys website for more information.
40 | DIREXION SHARES ETF TRUST PROSPECTUS |
Direxion Daily Japan Bear 3X Shares
Important Information Regarding the Fund
The Direxion Daily Japan Bear 3X Shares (Fund) seeks daily leveraged investment results. The pursuit of daily leveraged goals means that the Fund is riskier than alternatives that do not use leverage because the Funds objective is to magnify the performance of an index. The pursuit of daily leveraged investment goals means that the return of the Fund for a period longer than a full trading day may bear no resemblance to 300% of the return of its index for such longer period because the aggregate return of the Fund is the product of the series of daily leveraged returns for each trading day. The path of the benchmark during the longer period may be at least as important to the Funds return for the longer period as the cumulative return of the benchmark for the relevant longer period, especially in periods of market volatility. Further, the return for investors that invest for periods less than a full trading day or for a period different than a trading day will not be the product of the return of the Funds stated goal and the performance of the target index for the full trading day.
Investment Objective
The Fund seeks daily investment results, before fees and expenses, of 300% of the inverse (or opposite) of the performance of the MSCI Japan Index. The Fund seeks daily leveraged investment results and does not seek to achieve its stated investment objective over a period of time greater than one day. The Fund is different and much riskier than most exchange-traded funds.
The Fund is designed to be utilized only by knowledgeable investors who understand the potential consequences of seeking daily leveraged investment results, understand the risks associated with shorting and the use of leverage, and are willing to monitor their portfolios frequently. The Fund seeks daily leveraged investment results relative to the Index and is different and riskier than similarly benchmarked exchange-traded funds that do not use leverage. Therefore, the Fund is not intended to be used by, and is not appropriate for, investors who do not intend to actively monitor and manage their portfolios.
Fees and Expenses of the Fund
This table describes the fees and expenses that you may pay if you buy or hold shares of the Fund (Shares). Investors purchasing shares in the secondary market may pay costs (including customary brokerage commissions) charged by their broker.
Annual Fund Operating Expenses (1) (expenses that you pay each year as a percentage of the value of your investment)
Management Fees |
0.75% | |||
Distribution and/or Service (12b-1) Fees |
0.00% | |||
Other Expenses of the Fund |
0.25% | |||
Acquired Fund Fees and Expenses |
0.13% | |||
|
|
|||
Total Annual Fund Operating Expenses |
1.13% | |||
Expense Cap/Reimbursement |
(0.05% | ) | ||
|
|
|||
Total Annual Fund Operating Expenses After Expense Cap/Reimbursement |
1.08% | |||
|
|
(1) |
The Funds adviser, Rafferty Asset Management, LLC (Rafferty or the Adviser) has contractually agreed to cap all or a portion of its management fee and/or reimburse the Fund for Other Expenses through March 1, 2015, to the extent that the Funds Total Annual Operating Expenses exceed 0.95% (excluding, as applicable, among other expenses, taxes, leverage interest, Acquired Fund Fees and Expenses, dividends or interest on short positions, other interest expenses, brokerage commissions, expenses incurred in connection with any merger or reorganization and extraordinary expenses such as litigation). Any expense cap is subject to reimbursement by the Fund within the following three years only if overall expenses fall below these percentage limitations. This agreement may be terminated or revised at any time with the consent of the Board of Trustees. |
Expense Example
This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund for the time periods indicated and then redeem all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Funds operating expenses remain the same. Although your actual costs may be higher or lower, based on these assumptions your costs would be:
1 Year | 3 Years | |
|
||
$110 | $354 |
Portfolio Turnover
The Fund pays transaction costs, such as commissions, when it buys and sells securities (or turns over its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in a taxable account. These costs, which are not reflected in Annual Fund Operating Expenses or in the example, affect the Funds performance.
DIREXION SHARES ETF TRUST PROSPECTUS | 41 |
Principal Investment Strategies
The Fund, under normal circumstances, creates short positions by investing at least 80% of its assets in: futures contracts; options on securities, indices and futures contracts; equity caps, floors and collars; swap agreements; forward contracts; short positions; reverse repurchase agreements; exchange-traded funds (ETFs); and other financial instruments that, in combination, provide leveraged and unleveraged exposure to the MSCI Japan Index (Index). The Fund invests the remainder of its assets in short-term debt instruments that have terms-to-maturity of less than 397 days and exhibit high quality credit profiles, including U.S. government securities and repurchase agreements. The Fund does not invest in equity securities.
The Index is designed to measure the performance of the large and mid cap segments of the Japan equity market, covering approximately 85% of the free float-adjusted market capitalization in Japan. As of the date of its last reconstitution, the Index had a total dollar value of approximately $3.3 trillion, composed of 318 constituent securities ranging in market capitalization from approximately $1.4 billion to $207.3 billion.
The Fund may gain exposure to only a representative sample of the securities in the Index that have aggregate characteristics similar to those of the Index. The Fund gains this exposure by investing in a combination of financial instruments that, in combination, provide exposure to the underlying securities of the Index. The Fund seeks to remain fully invested at all times consistent with its stated goal. At the close of the markets each trading day, Rafferty positions the Funds portfolio so that its exposure to the Index is consistent with the Funds investment objective. The impact of the Indexs movements during the day will affect whether the Funds portfolio needs to be re-positioned. For example, if the Index has fallen on a given day, net assets of the Fund should rise, meaning that the Funds exposure will need to be increased. Conversely, if the Index has risen on a given day, net assets of the Fund should fall, meaning the Funds exposure will need to be reduced. This re-positioning strategy typically results in high portfolio turnover.
Because of daily rebalancing and the compounding of each days return over time, the return of the Fund for periods longer than a single day will be the result of each days returns compounded over the period, which will very likely differ from 300% of the return of the Index over the same period. The Fund will lose money if the Index performance is flat over time, and as a result of daily rebalancing, the Indexs volatility and the effects of compounding, it is even possible that the Fund will lose money over time while the Indexs performance decreases.
Additionally, because a significant portion of the assets of the Fund may come from investors using asset allocation and market timing investment strategies, the Fund may further need to engage in frequent trading. The Fund will concentrate its investment in a particular industry or group of industries to approximately the same extent as the Index is so concentrated.
Principal Risks
An investment in the Fund entails risk. The Fund could lose money or its performance could trail that of other investment alternatives. The Adviser cannot guarantee that the Fund will achieve its objective. In addition, the Fund presents some risks not traditionally associated with most mutual funds and exchange-traded funds. It is important that investors closely review all of the risks listed below and understand how these risks interrelate before making an investment in the Fund. Turbulence in financial markets and reduced liquidity in equity, credit and fixed income markets could negatively affect issuers worldwide, including the Fund. There is the risk that you could lose all or a portion of your money invested in the Fund.
Adverse Market Conditions Risk
Because the Fund magnifies the inverse performance of the Index, its performance will suffer during conditions in which the Index rises.
Advisers Investment Strategy Risk
The Adviser utilizes a quantitative methodology to select investments for the Fund. Although this methodology is designed to correlate the Funds performance with the performance of the Index, there is no assurance that such methodology will be successful and will enable the Fund to achieve its investment objective.
Cash Transaction Risk
Unlike most ETFs, the Fund currently intends to effect creations and redemptions principally for cash, rather than principally for in-kind securities, because of the nature of the financial instruments held by the Fund. As such, investments in Shares may be less tax efficient than investments in conventional ETFs.
Counterparty Risk
The Fund may invest in financial instruments involving counterparties for the purpose of attempting to gain exposure to a particular group of securities or an asset class without actually purchasing those securities or investments, or to hedge a position. These financial instruments may include swap agreements. The use of swap agreements and other counterparty instruments involves risks that are different from those associated with ordinary portfolio
42 | DIREXION SHARES ETF TRUST PROSPECTUS |
securities transactions. For example, the Fund bears the risk of loss of the amount expected to be received under a swap agreement in the event of the default or bankruptcy of a swap agreement counterparty. Swap agreements and other counterparty instruments also may be considered to be illiquid. In addition, the Fund may enter into swap agreements that involve a limited number of counterparties, which may increase the Funds exposure to counterparty credit risk. The Fund does not specifically limit its counterparty risk with respect to any single counterparty. Further, there is a risk that no suitable counterparties will be willing to enter into, or continue to enter into, transactions with the Fund and, as a result, the Fund may not be able to achieve its investment objective.
Currency Exchange Rate Risk
Changes in foreign currency exchange rates will affect the value of what the Fund owns and the Funds share price. Generally, when the U.S. dollar rises in value against a foreign currency, an investment in that country loses value because that currency is worth fewer U.S. dollars. Devaluation of a currency by a countrys government or banking authority also will have a significant impact on the value of any investments denominated in that currency. Currency markets generally are not as regulated as securities markets.
Daily Correlation Risk
There is no guarantee that the Fund will achieve a high degree of correlation to the Index and therefore achieve its daily investment objective. To achieve a high degree of correlation with the Index, the Fund seeks to rebalance its portfolio daily to keep leverage consistent with its daily target. The Fund may have difficulty achieving its daily target due to fees and expenses, high portfolio turnover, transaction costs and costs associated with the use of leveraged investment techniques and/or a temporary lack of liquidity in the markets for the securities held by the Fund. Market disruptions, regulatory restrictions or extreme volatility will also adversely affect the Funds ability to adjust exposure to the required levels. The Fund may not have investment exposure to all securities in its underlying Index, or its weighting of investment exposure to such stocks or industries may be different from that of the Index. In addition, the Fund may invest in securities or financial instruments not included in the underlying Index. The Fund may be subject to large movements of assets into and out of the Fund, potentially resulting in the Fund being over- or under-exposed to its Index. In addition, the target amount of portfolio exposure to the Index is impacted dynamically by the Indexs movement. Because of this, it is unlikely that the Fund will be perfectly exposed to the Index at the end of each day. The possibility of the Fund being materially over- or under-exposed to its Index increases on days when the Index is volatile near the close of the trading day. Activities surrounding annual index reconstitutions and other index rebalancing or reconstitution events may hinder the Funds ability to meet its daily investment objective on that day.
Derivatives Risk
The Fund uses investment techniques, including investments in derivatives such as futures and forward contracts, options and swaps, which may be considered aggressive. Investments in such derivatives are subject to market risks that may cause their prices to fluctuate over time and may increase the volatility of the Fund. The use of derivatives may expose the Fund to additional risks that it would not be subject to if it invested directly in the securities underlying those derivatives, such as counterparty risk and the risk that the derivatives may become illiquid. The use of derivatives may result in larger losses or smaller gains than otherwise would be the case. Additionally, with respect to the use of swap agreements, if the Index has a dramatic intraday move in value that causes a material decline in the Funds net asset value (NAV), the terms of the swap agreement between the Fund and its counterparty may allow the counterparty to immediately close out of the transaction with the Fund. In such circumstances, the Fund may be unable to enter into another swap agreement or invest in other derivatives to achieve the desired exposure consistent with the Funds daily investment objective. This may prevent the Fund from achieving its daily investment objective particularly if the Index reverses all or a portion of its intraday move by the end of the day. In addition, the Funds investments in derivatives, as of the date of this Prospectus, are subject to the following risks:
Futures and Forward Contracts. There may be an imperfect correlation between the changes in market value of the securities held by the Fund and the prices of futures contracts. There may not be a liquid secondary market for the futures contracts. Forward currency transactions include the risks associated with fluctuations in currency.
Options. There may be an imperfect correlation between the prices of options and movements in the price of the securities (or indices) hedged or used for cover, which may cause a given hedge not to achieve its objective.
Swap Agreements. Interest rate swaps are subject to interest rate and credit risk. Total return swaps are subject to counterparty risk, which relates to credit risk of the counterparty and liquidity risk of the swaps themselves.
DIREXION SHARES ETF TRUST PROSPECTUS | 43 |
Early Close/Trading Halt Risk
An exchange or market may close or issue trading halts on specific securities, or the ability to buy or sell certain securities or financial instruments may be restricted, which may result in the Fund being unable to buy or sell certain securities or financial instruments. In such circumstances, the Fund may be unable to rebalance its portfolio, may be unable to accurately price its investments and/or may incur substantial trading losses.
Effects of Compounding and Market Volatility Risk
The Fund does not attempt to, and should not be expected to, provide returns which are a multiple of the return of the Index for periods other than a single day. The Fund rebalances its portfolio on a daily basis, increasing exposure in response to that days gains or reducing exposure in response to that days losses. This means that for a period longer than one day, the pursuit of daily goals may result in daily leveraged compounding. It also means that the return of an index over a period of time greater than one day multiplied by the Funds daily target (300%) generally will not equal the Funds performance over that same period.
As a result, over time, the cumulative percentage increase or decrease in the value of the Funds portfolio may diverge significantly from the cumulative percentage increase or decrease in the multiple of the return of the Funds underlying index due to the compounding effect of losses and gains on the returns of the Fund. It also is expected that the Funds use of leverage will cause the Fund to underperform the return of three times its benchmark in a trendless or flat market.
The effect of compounding becomes more pronounced on the Funds performance as the Index experiences volatility. The Indexs volatility rate is a statistical measure of the magnitude of fluctuations in the returns of the Index. The table below provides examples of how Index volatility could affect the Funds performance. The chart shows estimated Fund returns for a number of combinations of performance and volatility over a one-year period and is shown to illustrate how holding the Fund for a period longer than one day may negatively impact investment return. As shown below, this Fund, or any other 3X Bear Fund, would be expected to lose 31.3% (as shown in Table 1 below) if its Index provided no return over a one year period during which the Index experienced annualized volatility of 25%. If the Indexs annualized volatility were to rise to 75%, the hypothetical loss for a one year period for the Fund widens to approximately 96.6%.
At higher ranges of volatility, there is a chance of a near complete loss of value even if the Index is flat. For instance, if the Indexs annualized volatility is 100%, the Fund would be expected to lose approximately 100% of its value, even if the cumulative Index return for the year was only 0%.
Table 1
One
Return |
300%
Return |
Volatility Rate | ||||||||||||||||||||||||
10% | 25% | 50% | 75% | 100% | ||||||||||||||||||||||
60% | 180% | 1371.5% | 973.9% | 248.6% | 46.5% | 96.1% | ||||||||||||||||||||
50% | 150% | 653.4% | 449.8% | 78.5% | 72.6% | 98.0% | ||||||||||||||||||||
40% | 120% | 336.0% | 218.2% | 3.3% | 84.2% | 98.9% | ||||||||||||||||||||
30% | 90% | 174.6% | 100.4% | 34.9% | 90.0% | 99.3% | ||||||||||||||||||||
20% | 60% | 83.9% | 34.2% | 56.4% | 93.3% | 99.5% | ||||||||||||||||||||
10% | 30% | 29.2% | 5.7% | 69.4% | 95.3% | 99.7% | ||||||||||||||||||||
0% | 0% | 5.8% | 31.3% | 77.7% | 96.6% | 99.8% | ||||||||||||||||||||
10% | 30% | 29.2% | 48.4% | 83.2% | 97.4% | 99.8% | ||||||||||||||||||||
20% | 60% | 45.5% | 60.2% | 87.1% | 98.0% | 99.9% | ||||||||||||||||||||
30% | 90% | 57.1% | 68.7% | 89.8% | 98.4% | 99.9% | ||||||||||||||||||||
40% | 120% | 65.7% | 75.0% | 91.9% | 98.8% | 99.9% | ||||||||||||||||||||
50% | 150% | 72.1% | 79.6% | 93.4% | 99.0% | 99.9% | ||||||||||||||||||||
60% | 180% | 77.0% | 83.2% | 94.6% | 99.2% | 99.9% |
The Indexs annualized historical volatility rate for the five-year period from May 30, 2008 through May 31, 2013 is 24.86%. The Indexs highest volatility rate for any one calendar year during the five-year period is 39.89% and volatility for a shorter period of time may have been substantially higher. The Indexs annualized performance for the five-year period from May 30, 2008 through May 31, 2013 is 1.88%. Historical Index volatility and performance are not indications of what the Index volatility and performance will be in the future.
For additional graphs and charts demonstrating the effects of volatility and index performance on the long-term performance of the Fund, see Additional Information Regarding Investment Techniques and Policies and Negative Implications of Daily Goals in Volatile Markets in the Funds statutory prospectus, and Special Note Regarding the Correlation Risks of the Funds in the Funds Statement of Additional Information.
Holding an unmanaged position opens the investor to the risk of market volatility adversely affecting the performance of the investment. The Fund is not appropriate for investors who do not intend to actively monitor and manage their portfolios. This table is intended to underscore the fact that the Fund is designed as a short-term trading vehicle for investors who intend to actively monitor and manage their portfolios.
To fully understand the risks of market volatility on the Fund, see Negative Implications of Daily Goals in Volatile Markets found in the statutory prospectus.
44 | DIREXION SHARES ETF TRUST PROSPECTUS |
Foreign Securities Risk
Indirectly investing in foreign instruments may involve greater risks than investing in domestic instruments. As a result, the Funds returns and NAVs may be affected to a large degree by fluctuations in currency exchange rates, interest rates, political, diplomatic or economic conditions and regulatory requirements in other countries. The laws and accounting, auditing, and financial reporting standards in foreign countries typically are not as strict as they are in the U.S., and there may be less public information available about foreign companies.
Gain Limitation Risk
If the Funds benchmark moves more than 33% on a given trading day in a direction adverse to the Fund, you would lose all of your money. Rafferty will attempt to position the Funds portfolio to ensure that the Fund does not lose more than 90% of its NAV on a given day. The cost of such downside protection will be limitations on the Funds gains. As a consequence, the Funds portfolio may not be responsive to Index losses beyond 30% in a given day. For example, if the Index were to lose 35%, the Fund might be limited to a daily gain of 90% rather than 105%, which is 300% of the Index loss of 35%.
Geographic Concentration Risk
Investments in a particular country or geographic region may be particularly susceptible to political, diplomatic or economic conditions and regulatory requirements. As a result, the Fund may be more volatile than a more geographically diversified fund.
High Portfolio Turnover Risk
Daily rebalancing of the Funds holdings pursuant to its daily investment objective causes a much greater number of portfolio transactions when compared to most exchange-traded funds. Such frequent and active trading leads to significantly higher transaction costs because of increased broker commissions resulting from such transactions. In addition, there is the possibility of significantly increased capital gains, including short-term and/or long-term capital gains that will be taxable to shareholders as ordinary income. The Fund calculates portfolio turnover without including the short term cash instruments or derivative transactions that comprise the majority of the Funds trading. As such, if the Funds extensive use of derivative instruments were reflected, the calculated portfolio turnover rate would be significantly higher.
Intra-Day Investment Risk
The Fund seeks leveraged investment results from the close of the market on a given trading day until the close of the market on the subsequent trading day. The exact exposure of an investment in the Fund intraday in the secondary market is a function of the difference between the value of the Index at the market close on the first trading day and the value of the Index at the time of purchase. The Funds gains occur as its market exposure declines and its losses are accompanied by increases in market exposure. If the Index declines, the Funds net assets will rise by an amount equal to the decline in the Funds exposure. Conversely, if the Index rises the Funds net assets will decline by the same amount as the increase in the Funds exposure. As an example (using simplified numbers), if the Fund had $100 in net assets at the market close, it would seek $300 of exposure to the next trading days Index performance. If the Index declined by 1% by noon the following trading day, the exposure of the Fund will fall by 1% to $297 and the net assets will rise by $3 to $103. With net assets of $103 and exposure of $297, a purchaser at that point would be receiving 288% exposure of her investment instead of 300%
Inverse Correlation Risk
Shareholders should lose money when the Index rises, which is a result that is the opposite from traditional funds.
Japanese Securities Risk
Investment in securities of Japanese issuers involves risks that may be greater than if the Funds investments were more geographically diverse. The Japanese economy has recently emerged from a prolonged economic downturn. Since 2000, Japans economic growth rate has remained relatively low. Its economy is characterized by government intervention and protectionism, an unstable financial services sector and relatively high unemployment. Japans economy is heavily dependent on international trade and has been adversely affected by trade tariffs and competition from emerging economies. As such, economic growth is heavily dependent on continued growth in international trade, government support of the financial services sector, among other troubled sectors, and consistent government policy. Any changes or trends in these economic factors could have a significant impact on Japans economy overall and may negatively affect the Funds investment. Japans economy is also closely tied to its two largest trading partners, the U.S. and China. Economic volatility in either nation may create volatility for Japans economy as well. Additionally, as China has increased its role with Japan as a trading partner, political tensions between the countries has become strained. Any increase or decrease in such tension may have consequences for investment in Japanese issuers.
Leverage Risk
If you invest in the Fund, you are exposed to the risk that an increase in the daily performance of the Index will be
DIREXION SHARES ETF TRUST PROSPECTUS | 45 |
leveraged. This means that your investment in the Fund will be reduced by an amount equal to 3% for every 1% daily increase, not including the cost of financing the portfolio and the impact of operating expenses, which would further lower your investment. The Fund could theoretically lose an amount greater than its net assets in the event of an Index increase of more than 33%. Further, purchasing shares during a day may result in greater than 300% exposure to the performance of the Index if the Index rises between the close of the markets on one trading day and before the close of the markets on the next trading day.
To fully understand the risks of using leverage in the Fund, see Effects of Compounding and Market Volatility Risk above.
Liquidity Risk
Some securities held by the Fund, including derivatives, may be difficult to sell or illiquid, particularly during times of market turmoil. Illiquid securities also may be difficult to value. If the Fund is forced to sell an illiquid security at an unfavorable time or at a price that is lower than Raffertys judgment of the securitys true market value, the Fund may be forced to sell the security at a loss. Such a situation may prevent the Fund from limiting losses, realizing gains or achieving a high correlation with the Index.
Market Risk
The Fund is subject to market risks that can affect the value of its shares. These risks include political, regulatory, market and economic developments, including developments that impact specific economic sectors, industries or segments of the market.
Market Timing Risk
Rafferty expects a significant portion of the assets of the Fund to come from professional money managers and investors who use the Funds as part of asset allocation and market timing investment strategies. These strategies often call for frequent trading which may lead to increased portfolio turnover, higher transaction costs, and the possibility of increased capital gains, including short-term and/or long-term capital gain that will be taxable to shareholders as ordinary income.
Mid Capitalization Company Risk
Investing in the securities of mid capitalization companies, and securities that provide exposure to mid capitalization companies, involves greater risks and the possibility of greater price volatility than investing in more-established, larger capitalization companies. Mid capitalization companies often have narrower markets for their goods and/or services and more limited managerial and financial resources than larger, more established companies. Furthermore, those companies often have limited product lines, services, markets, financial resources or are dependent on a small management group. In addition, because these stocks are not well-known to the investing public, do not have significant institutional ownership and are followed by relatively few security analysts, there will normally be less publicly available information concerning these securities compared to what is available for the securities of larger companies. Adverse publicity and investor perceptions, whether based on fundamental analysis, can decrease the value and liquidity of securities held by the Fund. As a result, their performance can be more volatile and they face greater risk of business failure, which could increase the volatility of the Funds portfolio.
Non-Diversification Risk
The Fund is non-diversified, which means it invests a high percentage of its assets in a limited number of securities. A non-diversified funds NAV and total return may fluctuate more or fall greater in times of weaker markets than a conventional diversified fund.
Regulatory Risk
The Fund is subject to the risk that a change in U.S. law and related regulations will impact the way the Fund operates, increase the particular costs of the Funds operations and/or change the competitive landscape.
Risks of Investing in Other Investment Companies (including ETFs)
Investments in the securities of other investment companies, including ETFs, may involve duplication of advisory fees and certain other expenses. Fund shareholders indirectly bear the Funds proportionate share of the fees and expenses indirectly paid by shareholders of the other investment company or ETF, in addition to the fees and expenses Fund shareholders bear in connection with the Funds own operations. The Funds performance may be magnified positively or negatively by virtue of its investment in other investment companies. If the investment company or ETF fails to achieve its investment objective, the value of the Funds investment will decline, adversely affecting the Funds performance. In addition, closed end investment company and ETF shares potentially may trade at a discount or a premium and are subject to brokerage and other trading costs, which could result in greater expenses to the Fund. Finally, because the value of ETF shares depends on the demand in the market, the Adviser may not be able to liquidate the Funds holdings in those shares at the most optimal time, adversely affecting the Funds performance.
46 | DIREXION SHARES ETF TRUST PROSPECTUS |
Shorting Risk
The Fund may engage in short sales designed to earn the Fund a profit from the decline in the price of particular securities, baskets of securities or indices. However, there is a risk that the Fund will experience a loss as a result of engaging in these short sales.
Tax and Distribution Risk
The Fund has extremely high portfolio turnover which causes the Fund to generate significant amounts of taxable income. This income is typically short-term capital gain, which is generally treated as ordinary income when distributed to shareholders, or short-term capital loss. The Fund rarely generates long-term capital gain or loss. The Fund will generally need to distribute net short-term capital gain to satisfy certain tax requirements. As a result of the Funds high portfolio turnover, the Fund could make larger and/or more frequent distributions than traditional unleveraged ETFs. Because the Funds asset level changes frequently, these distributions could comprise a substantial portion or even all of the Funds net assets if the Fund distributes this income after a decline in its net assets. In addition, the Fund may be held by short-term investors and these investors may exit the Fund prior to the record date of a distribution. As a result, shareholders in the Fund on the day of a distribution may receive substantial distributions, which could lead to negative tax implications for such shareholders. Potential investors are urged to consult their own tax advisers for more detailed information.
Rules governing the federal income tax aspects of certain derivatives, including total return equity swaps, real estate-related swaps, credit default swaps and other credit derivatives are not entirely clear. Because the Funds status as a regulated investment company might be affected if the Internal Revenue Service did not accept the Funds treatment of certain transactions involving derivatives, the Funds ability to engage in these transactions may be limited.
Tracking Error Risk
The Fund may have difficulty achieving its daily target due to fees and expenses, high portfolio turnover, transaction costs, and/or a temporary lack of liquidity in the markets for the securities held by the Fund. A failure to achieve a daily target may cause the Fund to provide returns for a longer period that are worse than expected. In addition, even though the Fund may meet its daily target for a period of time, this will not necessarily produce the returns that might be expected in light of the returns of the Index or the Funds benchmark for that period.
Valuation Time Risk
The Fund values its portfolio as of the close of regular trading on the New York Stock Exchange (NYSE) (generally 4:00 P.M. Eastern time). In some cases, foreign market indices close before the NYSE opens or may not be open for business on the same calendar days as the Fund. As a result, the daily performance of the Fund can vary from the performance of the Index.
Special Risks of Exchange-Traded Funds
Not Individually Redeemable. Shares are not individually redeemable and may be redeemed by the Fund at NAV only in large blocks known as Creation Units. You may incur brokerage costs purchasing enough Shares to constitute a Creation Unit.
Trading Issues. Trading in Shares on an exchange may be halted due to market conditions or for reasons that, in the view of that exchange, make trading in Shares inadvisable, such as extraordinary market volatility or other reasons. There can be no assurance that Shares will continue to meet the listing requirements of the exchange on which it trades, and the listing requirements may be amended from time to time.
Market Price Variance Risk. Individual Shares of the Fund that are listed for trading on an exchange can be bought and sold in the secondary market at market prices. The market prices of Shares will fluctuate in response to changes in NAV and supply and demand for Shares. The Adviser cannot predict whether Shares will trade above, below or at their NAV. Differences between secondary market prices and NAV for Shares may be due largely to supply and demand forces in the secondary market, which forces may not be the same as those influencing prices for securities or instruments held by the Fund at a particular time. Given the fact that Shares can be created and redeemed in Creation Units, the Adviser believes that large discounts or premiums to the NAV of Shares should not be sustained. There may, however, be times when the market price and the NAV vary significantly and you may pay more than NAV when buying Shares on the secondary market, and you may receive less than NAV when you sell those Shares. The market price of Shares, like the price of any exchange-traded security, includes a bid-ask spread charged by the exchange specialists, market makers or other participants that trade the particular security. In times of severe market disruption, the bid-ask spread often increases significantly. This means that Shares may trade at a discount to NAV and the discount is likely to be greatest when the price of Shares is falling fastest, which may be the time that you most want to sell your Shares. The Funds investment results are measured based upon the daily NAV of the Fund over a period of time. Investors purchasing and selling Shares in the secondary
DIREXION SHARES ETF TRUST PROSPECTUS | 47 |
market may not experience investment results consistent with those experienced by those creating and redeeming directly with the Fund. There is no guarantee that an active secondary market will develop for Shares of the Fund.
Fund Performance
The Fund has not yet commenced operations; therefore, performance information is not yet available. In the future, performance information for the Fund will be presented in this section. Performance information also will be available on the Funds website at http://www.direxionfunds.com/products?presets=etfs&activetab=performance or by calling the Fund toll free at 1-866-476-7523.
Management
Investment Adviser
Rafferty Asset Management, LLC is the Funds investment adviser.
Portfolio Manager
Paul Brigandi, the Funds Portfolio Manager, is primarily responsible for the day-to-day management of the Fund and has served in this role since the Funds inception.
Purchase and Sale of Fund Shares
The Fund will issue and redeem Shares in exchange for cash only to Authorized Participants in large blocks, known as Creation Units, each of which is comprised of 50,000 Shares. Retail investors may only purchase and sell Fund Shares on a national securities exchange through a broker-dealer. Because the Shares trade at market prices rather than NAV, Shares may trade at a price greater than NAV (premium) or less than NAV (discount).
Tax Information
The Fund intends to make distributions that may be taxed as ordinary income or long-term capital gains. Those distributions will be subject to federal income taxes and may also be subject to state and local taxes. Distributions by the Fund may be significantly higher than those of most exchange-traded funds.
Payments to Broker-Dealers and Other Financial Intermediaries
If you purchase the Fund through a broker-dealer or other financial intermediary (such as a bank or financial advisor), the Fund and/or the Adviser may pay the intermediary for the sale of Fund shares and related services. These payments may create a conflict of interest by influencing the broker-dealer or other financial intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your financial intermediarys website for more information.
48 | DIREXION SHARES ETF TRUST PROSPECTUS |
Direxion Daily Mexico Bull 3X Shares
Important Information Regarding the Fund
The Direxion Daily Mexico Bull 3X Shares (Fund) seeks daily leveraged investment results. The pursuit of daily leveraged goals means that the Fund is riskier than alternatives that do not use leverage because the Funds objective is to magnify the performance of an index. The pursuit of daily leveraged investment goals means that the return of the Fund for a period longer than a full trading day may bear no resemblance to 300% of the return of its index for such longer period because the aggregate return of the Fund is the product of the series of daily leveraged returns for each trading day. The path of the benchmark during the longer period may be at least as important to the Funds return for the longer period as the cumulative return of the benchmark for the relevant longer period, especially in periods of market volatility. Further, the return for investors that invest for periods less than a full trading day or for a period different than a trading day will not be the product of the return of the Funds stated goal and the performance of the target index for the full trading day.
Investment Objective
The Fund seeks daily investment results, before fees and expenses, of 300% of the performance of the MSCI Mexico IMI 25/50 Index. The Fund seeks daily leveraged investment results and does not seek to achieve its stated investment objective over a period of time greater than one day. The Fund is different and much riskier than most exchange-traded funds.
The Fund is designed to be utilized only by knowledgeable investors who understand the potential consequences of seeking daily leveraged investment results, understand the risks associated with the use of leverage and are willing to monitor their portfolios frequently. The Fund seeks daily leveraged investment results relative to the Index and is different and riskier than similarly benchmarked exchange-traded funds that do not use leverage. Therefore, the Fund is not intended to be used by, and is not appropriate for, investors who do not intend to actively monitor and manage their portfolios.
Fees and Expenses of the Fund
This table describes the fees and expenses that you may pay if you buy or hold shares of the Fund (Shares). Investors purchasing shares in the secondary market may pay costs (including customary brokerage commissions) charged by their broker.
Annual Fund Operating Expenses (1) (expenses that you pay each year as a percentage of the value of your investment)
Management Fees |
0.75% | |||
Distribution and/or Service (12b-1) Fees |
0.00% | |||
Other Expenses of the Fund |
0.25% | |||
Acquired Fund Fees and Expenses |
0.15% | |||
|
|
|||
Total Annual Fund Operating Expenses |
1.15% | |||
Expense Cap/Reimbursement |
(0.05% | ) | ||
|
|
|||
Total Annual Fund Operating Expenses After Expense Cap/Reimbursement |
1.10% | |||
|
|
(1) |
The Funds adviser, Rafferty Asset Management, LLC (Rafferty or the Adviser) has contractually agreed to cap all or a portion of its management fee and/or reimburse the Fund for Other Expenses through March 1, 2015, to the extent that the Funds Total Annual Operating Expenses exceed 0.95% (excluding, as applicable, among other expenses, taxes, leverage interest, Acquired Fund Fees and Expenses, dividends or interest on short positions, other interest expenses, brokerage commissions, expenses incurred in connection with any merger or reorganization and extraordinary expenses such as litigation). Any expense cap is subject to reimbursement by the Fund within the following three years only if overall expenses fall below these percentage limitations. This agreement may be terminated or revised at any time with the consent of the Board of Trustees. |
Expense Example
This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund for the time periods indicated and then redeem all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Funds operating expenses remain the same. Although your actual costs may be higher or lower, based on these assumptions your costs would be:
1 Year | 3 Years | |
|
||
$112 | $360 |
Portfolio Turnover
The Fund pays transaction costs, such as commissions, when it buys and sells securities (or turns over its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in a taxable account. These costs, which are not reflected in Annual Fund Operating Expenses or in the example, affect the Funds performance.
DIREXION SHARES ETF TRUST PROSPECTUS | 49 |
Principal Investment Strategies
The Fund, under normal circumstances, creates long positions by investing at least 80% of its assets in the securities that comprise the MSCI Mexico IMI 25/50 Index (Index) and/or financial instruments that provide leveraged and unleveraged exposure to the Index. These financial instruments include: futures contracts; options on securities, indices and futures contracts; equity caps, floors and collars; swap agreements; forward contracts; short positions; reverse repurchase agreements; exchange-traded funds (ETFs); and other financial instruments. On a day-to-day basis, the Fund also may hold short-term debt instruments that have terms-to-maturity of less than 397 days and exhibit high quality credit profiles, including U.S. government securities and repurchase agreements.
Mexico is considered an emerging market, as that term is defined by the index provider. The determination that Mexico is an emerging market is based on it being an economy that is in the initial stages of industrialization and has been historically marked by low per capita income and lack of capital market transparency, but appears to be implementing political and/or market reforms resulting in greater capital market transparency, increased access for foreign investors and generally improved economic conditions. Emerging markets have the potential for significantly higher or lower rates of return and carry greater risks than more developed economies.
The Index is designed to measure the performance of the large, mid and small cap segments of the Mexican equity market, covering approximately 99% of the free float-adjusted market capitalization in Mexico. As of the date of its last reconstitution, the Index had a total dollar value of approximately $198.1 billion, composed of 47 constituent securities ranging in market capitalization from approximately $76.9 million to $37.8 billion. Additionally, as of May 31, 2013, the Index is concentrated in the consumer staples sector, but this concentration may change in the future based on the Indexs methodology and the varying nature of Mexicos economy.
The Index applies certain screens and weightings to take into account the investment limits placed on regulated investment companies (RICs) under federal tax regulations. One such requirement is that at the end of each quarter of a RICs tax year, no more than 25% of its assets may be invested in a single issuer and the sum of the weights of all issuers representing more than 5% of the RIC should not exceed 50% of its total assets. The Index aims to reflect these requirements in the selection and weighting of its component securities.
The Fund may gain exposure to only a representative sample of the securities in the Index that have aggregate characteristics similar to those of the Index. The Fund gains this exposure either by directly investing in the underlying securities of the Index or by investing in derivatives that provide exposure to those securities. The Fund seeks to remain fully invested at all times consistent with its stated goal. At the close of the markets each trading day, Rafferty positions the Funds portfolio so that its exposure to the Index is consistent with the Funds investment objective. The impact of the Indexs movements during the day will affect whether the Funds portfolio needs to be re-positioned. For example, if the Index has risen on a given day, net assets of the Fund should rise, meaning that the Funds exposure will need to be increased. Conversely, if the Index has fallen on a given day, net assets of the Fund should fall, meaning the Funds exposure will need to be reduced. This re-positioning strategy typically results in high portfolio turnover.
Because of daily rebalancing and the compounding of each days return over time, the return of the Fund for periods longer than a single day will be the result of each days returns compounded over the period, which will very likely differ from 300% of the return of the Index over the same period. The Fund will lose money if the Index performance is flat over time, and as a result of daily rebalancing, the Indexs volatility and the effects of compounding, it is even possible that the Fund will lose money over time while the Indexs performance increases.
Additionally, because a significant portion of the assets of the Fund may come from investors using asset allocation and market timing investment strategies, the Fund may further need to engage in frequent trading. The Fund will concentrate its investment in a particular industry or group of industries to approximately the same extent as the Index is so concentrated.
Principal Risks
An investment in the Fund entails risk. The Fund could lose money or its performance could trail that of other investment alternatives. The Adviser cannot guarantee that the Fund will achieve its objective. In addition, the Fund presents some risks not traditionally associated with most mutual funds and exchange-traded funds. It is important that investors closely review all of the risks listed below and understand how these risks interrelate before making an investment in the Fund. Turbulence in financial markets and reduced liquidity in equity, credit and fixed income markets could negatively affect issuers worldwide, including the Fund. There is the risk that you could lose all or a portion of your money invested in the Fund.
Adverse Market Conditions Risk
Because the Fund magnifies the performance of the Index, its performance will suffer during conditions in which the Index declines.
50 | DIREXION SHARES ETF TRUST PROSPECTUS |
Advisers Investment Strategy Risk
The Adviser utilizes a quantitative methodology to select investments for the Fund. Although this methodology is designed to correlate the Funds performance with the performance of the Index, there is no assurance that such methodology will be successful and will enable the Fund to achieve its investment objective.
Concentration Risk
The Index is concentrated in the consumer staples sector, however, in the future, the Index concentration may change. The Fund will concentrate its investments in a particular industry or group of industries to approximately the same extent as the Index is so concentrated. The performance of the Fund may be more volatile than a fund that does not concentrate its investments in a specific industry or group of industries. The Fund also may be more susceptible to any single economic market, political or regulatory occurrence affecting that industry or group of industries. However, the Fund only may concentrate its investments ( i.e. , hold 25% or more of its total assets in the stocks of a particular industry or group of industries) to approximately the same extent that its underlying index concentrates in the stocks of a particular industry or group of industries. For purposes of this limitation, securities of the U.S. Government (including its agencies and instrumentalities), repurchase agreements collateralized by U.S. Government securities, and securities of state or municipal governments and their political subdivisions are not considered to be issued by members of any industry.
Consumer Staples Sector Risk
The Fund currently focuses its investments in securities issued by, and/or has exposure to, companies in the consumer staples sector. The consumer staples sector may be affected by the permissibility of using various food additives and production methods, changing consumer tastes, marketing campaigns and other factors affecting consumer demand. In particular, tobacco companies may be adversely affected by new laws, regulations and litigation. The consumer staples sector may also be adversely affected by changes or trends in commodity prices, which may be influenced or characterized by unpredictable factors.
Counterparty Risk
The Fund may invest in financial instruments involving counterparties for the purpose of attempting to gain exposure to a particular group of securities or an asset class without actually purchasing those securities or investments, or to hedge a position. These financial instruments may include swap agreements. The use of swap agreements and other counterparty instruments involves risks that are different from those associated with ordinary portfolio securities transactions. For example, the Fund bears the risk of loss of the amount expected to be received under a swap agreement in the event of the default or bankruptcy of a swap agreement counterparty. Swap agreements and other counterparty instruments also may be considered to be illiquid. In addition, the Fund may enter into swap agreements that involve a limited number of counterparties, which may increase the Funds exposure to counterparty credit risk. The Fund does not specifically limit its counterparty risk with respect to any single counterparty. Further, there is a risk that no suitable counterparties will be willing to enter into, or continue to enter into, transactions with the Fund and, as a result, the Fund may not be able to achieve its investment objective.
Currency Exchange Rate Risk
Changes in foreign currency exchange rates will affect the value of what the Fund owns and the Funds share price. Generally, when the U.S. dollar rises in value against a foreign currency, an investment in that country loses value because that currency is worth fewer U.S. dollars. Devaluation of a currency by a countrys government or banking authority also will have a significant impact on the value of any investments denominated in that currency. Currency markets generally are not as regulated as securities markets.
Daily Correlation Risk
There is no guarantee that the Fund will achieve a high degree of correlation to the Index and therefore achieve its daily investment objective. To achieve a high degree of correlation with the Index, the Fund seeks to rebalance its portfolio daily to keep leverage consistent with its daily target. The Fund may have difficulty achieving its daily target due to fees and expenses, high portfolio turnover, transaction costs and costs associated with the use of leveraged investment techniques and/or a temporary lack of liquidity in the markets for the securities held by the Fund. Market disruptions, regulatory restrictions or extreme volatility will also adversely affect the Funds ability to adjust exposure to the required levels. The Fund may not have investment exposure to all securities in its underlying Index, or its weighting of investment exposure to such stocks or industries may be different from that of the Index. In addition, the Fund may invest in securities or financial instruments not included in the underlying Index. The Fund may be subject to large movements of assets into and out of the Fund, potentially resulting in the Fund being over- or under-exposed to its Index. In addition, the target amount of portfolio exposure to the Index is impacted dynamically by the Indexs movement. Because of this, it is unlikely that the Fund will be perfectly exposed to the Index at the end of each day. The possibility of the Fund being materially over-
DIREXION SHARES ETF TRUST PROSPECTUS | 51 |
or under-exposed to its Index increases on days when the Index is volatile near the close of the trading day. Activities surrounding annual index reconstitutions and other index rebalancing or reconstitution events may hinder the Funds ability to meet its daily investment objective on that day.
Depositary Receipt Risk
To the extent the Fund seeks exposure to foreign companies, the Funds investments may be in the form of depositary receipts or other securities convertible into securities of foreign issuers, including American Depositary Receipts (ADRs), European Depositary Receipts (EDRs), and Global Depositary Receipts (GDRs). While the use of ADRs, EDRs and GDRs, which are traded on exchanges and represent and ownership in a foreign security, provide an alternative to directly purchasing the underlying foreign securities in their respective national markets and currencies, investments in ADRs, EDRs, and GDRs continue to be subject to certain of the risks associated with investing directly in foreign securities.
Derivatives Risk
The Fund uses investment techniques, including investments in derivatives such as futures and forward contracts, options and swaps, which may be considered aggressive. Investments in such derivatives are subject to market risks that may cause their prices to fluctuate over time and may increase the volatility of the Fund. The use of derivatives may expose the Fund to additional risks that it would not be subject to if it invested directly in the securities underlying those derivatives, such as counterparty risk and the risk that the derivatives may become illiquid. The use of derivatives may result in larger losses or smaller gains than otherwise would be the case. Additionally, with respect to the use of swap agreements, if the Index has a dramatic intraday move in value that causes a material decline in the Funds net asset value (NAV), the terms of the swap agreement between the Fund and its counterparty may allow the counterparty to immediately close out of the transaction with the Fund. In such circumstances, the Fund may be unable to enter into another swap agreement or invest in other derivatives to achieve the desired exposure consistent with the Funds daily investment objective. This may prevent the Fund from achieving its daily investment objective particularly if the Index reverses all or a portion of its intraday move by the end of the day. In addition, the Funds investments in derivatives, as of the date of this Prospectus, are subject to the following risks:
Futures and Forward Contracts . There may be an imperfect correlation between the changes in market value of the securities held by the Fund and the prices of futures contracts. There may not be a liquid secondary market for the futures contracts. Forward currency transactions include the risks associated with fluctuations in currency.
Options . There may be an imperfect correlation between the prices of options and movements in the price of the securities (or indices) hedged or used for cover, which may cause a given hedge not to achieve its objective.
Swap Agreements . Interest rate swaps are subject to interest rate and credit risk. Total return swaps are subject to counterparty risk, which relates to credit risk of the counterparty and liquidity risk of the swaps themselves.
Early Close/Trading Halt Risk
An exchange or market may close or issue trading halts on specific securities, or the ability to buy or sell certain securities or financial instruments may be restricted, which may result in the Fund being unable to buy or sell certain securities or financial instruments. In such circumstances, the Fund may be unable to rebalance its portfolio, may be unable to accurately price its investments and/or may incur substantial trading losses.
Effects of Compounding and Market Volatility Risk
The Fund does not attempt to, and should not be expected to, provide returns which are a multiple of the return of the Index for periods other than a single day. The Fund rebalances its portfolio on a daily basis, increasing exposure in response to that days gains or reducing exposure in response to that days losses. This means that for a period longer than one day, the pursuit of daily goals may result in daily leveraged compounding. It also means that the return of an index over a period of time greater than one day multiplied by the Funds daily target (300%) generally will not equal the Funds performance over that same period.
As a result, over time, the cumulative percentage increase or decrease in the value of the Funds portfolio may diverge significantly from the cumulative percentage increase or decrease in the multiple of the return of the Funds underlying index due to the compounding effect of losses and gains on the returns of the Fund. It also is expected that the Funds use of leverage will cause the Fund to underperform the return of three times its benchmark in a trendless or flat market.
The effect of compounding becomes more pronounced on the Funds performance as the Index experiences volatility. The Indexs volatility rate is a statistical measure of the magnitude of fluctuations in the returns of the Index. The table below provides examples of how Index volatility could affect the Funds performance. The chart shows estimated Fund returns for a number of combinations of performance and volatility over a one-year period and is shown to illustrate how holding the Fund for a period longer than one day may negatively impact investment return. As shown below, this Fund, or any other 3X Bull Fund, would be
52 | DIREXION SHARES ETF TRUST PROSPECTUS |
expected to lose 17.1% (as shown in Table 1 below) if its Index provided no return over a one year period during which the Index experienced annualized volatility of 25%. If the Indexs annualized volatility were to rise to 75%, the hypothetical loss for a one year period for the Fund widens to approximately 81.5%.
At higher ranges of volatility, there is a chance of a near complete loss of value even if the Index is flat. For instance, if the Indexs annualized volatility is 100%, the Fund would be expected to lose 95% of its value, even if the cumulative Index return for the year was only 0%.
Table 1
One
Return |
300%
Return |
Volatility Rate | ||||||||||||||||||||||||
10% | 25% | 50% | 75% | 100% | ||||||||||||||||||||||
60% | 180% | 93.8% | 94.7% | 97.0% | 98.8% | 99.7% | ||||||||||||||||||||
50% | 150% | 87.9% | 89.6% | 94.1% | 97.7% | 99.4% | ||||||||||||||||||||
40% | 120% | 79.0% | 82.1% | 89.8% | 96.0% | 98.9% | ||||||||||||||||||||
30% | 90% | 66.7% | 71.6% | 83.8% | 93.7% | 98.3% | ||||||||||||||||||||
20% | 60% | 50.3% | 57.6% | 75.8% | 90.5% | 97.5% | ||||||||||||||||||||
10% | 30% | 29.3% | 39.6% | 65.6% | 86.5% | 96.4% | ||||||||||||||||||||
0% | 0% | 3.0% | 17.1% | 52.8% | 81.5% | 95.0% | ||||||||||||||||||||
10% | 30% | 29.2% | 10.3% | 37.1% | 75.4% | 93.4% | ||||||||||||||||||||
20% | 60% | 67.7% | 43.3% | 18.4% | 68.0% | 91.4% | ||||||||||||||||||||
30% | 90% | 113.2% | 82.1% | 3.8% | 59.4% | 89.1% | ||||||||||||||||||||
40% | 120% | 166.3% | 127.5% | 29.6% | 49.2% | 86.3% | ||||||||||||||||||||
50% | 150% | 227.5% | 179.8% | 59.4% | 37.6% | 83.2% | ||||||||||||||||||||
60% | 180% | 297.5% | 239.6% | 93.5% | 24.2% | 79.6% |
The Indexs annualized historical volatility rate for the five-year period from May 30, 2008 through May 31, 2013 is 30.79%. The Indexs highest volatility rate for any one calendar year during the five-year period is 52.75% and volatility for a shorter period of time may have been substantially higher. The Indexs annualized performance for the five-year period from May 30, 2008 through May 31, 2013 is 2.89%. Historical Index volatility and performance are not indications of what the Index volatility and performance will be in the future.
For additional graphs and charts demonstrating the effects of volatility and index performance on the long-term performance of the Fund, see Additional Information Regarding Investment Techniques and Policies and Negative Implications of Daily Goals in Volatile Markets in the Funds statutory prospectus, and Special Note Regarding the Correlation Risks of the Funds in the Funds Statement of Additional Information.
Holding an unmanaged position opens the investor to the risk of market volatility adversely affecting the performance of the investment. The Fund is not appropriate for investors who do not intend to actively monitor and manage their portfolios. This table is intended to underscore the fact that the Fund is designed as a short-term trading vehicle for investors who intend to actively monitor and manage their portfolios.
To fully understand the risks of market volatility on the Fund, see Negative Implications of Daily Goals in Volatile Markets found in the statutory prospectus.
Emerging Markets Risk
Indirectly investing in emerging markets instruments involve greater risks than indirectly investing in foreign instruments in general. Risks of investing in emerging market countries include: political or social upheaval; nationalization of businesses; restrictions on foreign ownership; prohibitions on the repatriation of assets; and risks from an economys dependence on revenues from particular commodities or industries. In addition, currency transfer restrictions, limited potential buyers for such instruments, delays and disruption in settlement procedures and illiquidity or low volumes of transactions may make exits difficult or impossible at times.
Equity Securities Risk
Investments in publicly issued equity securities and securities that provide exposure to equity securities, including common stocks, in general are subject to market risks that may cause their prices to fluctuate over time. Fluctuations in the value of equity securities in which the Fund invests will cause the NAV of the Fund to fluctuate.
Foreign Securities Risk
Indirectly investing in foreign instruments may involve greater risks than investing in domestic instruments. As a result, the Funds returns and NAVs may be affected to a large degree by fluctuations in currency exchange rates, interest rates, political, diplomatic or economic conditions and regulatory requirements in other countries. The laws and accounting, auditing, and financial reporting standards in foreign countries typically are not as strict as they are in the U.S., and there may be less public information available about foreign companies.
Gain Limitation Risk
If the Funds benchmark moves more than 33% on a given trading day in a direction adverse to the Fund, you would lose all of your money. Rafferty will attempt to position the Funds portfolio to ensure that the Fund does not lose more than 90% of its NAV on a given day. The cost of such downside protection will be limitations on the Funds gains. As a consequence, the Funds portfolio may not be responsive to Index gains beyond 30% in a given day. For example, if the Index were to gain 35%, the Fund might be limited to a daily gain of 90% rather than 105%, which is 300% of the Index gain of 35%.
DIREXION SHARES ETF TRUST PROSPECTUS | 53 |
Geographic Concentration Risk
Investments in a particular country or geographic region may be particularly susceptible to political, diplomatic or economic conditions and regulatory requirements. As a result, the Fund may be more volatile than a more geographically diversified fund.
High Portfolio Turnover Risk
Daily rebalancing of the Funds holdings pursuant to its daily investment objective causes a much greater number of portfolio transactions when compared to most exchange-traded funds. Such frequent and active trading leads to significantly higher transaction costs because of increased broker commissions resulting from such transactions. In addition, there is the possibility of significantly increased capital gains, including short-term and/or long-term capital gains that will be taxable to shareholders as ordinary income. The Fund calculates portfolio turnover without including the short term cash instruments or derivative transactions that comprise the majority of the Funds trading. As such, if the Funds extensive use of derivative instruments were reflected, the calculated portfolio turnover rate would be significantly higher.
Intra-Day Investment Risk
The Fund seeks leveraged investment results from the close of the market on a given trading day until the close of the market on the subsequent trading day. The exact exposure of an investment in the Fund intraday in the secondary market is a function of the difference between the value of the Index at the market close on the first trading day and the value of the Index at the time of purchase. If the Index gains value, the Funds net assets will rise by the same amount as the Funds exposure. Conversely, if the Index declines, the Funds net assets will decline by the same amount as the Funds exposure. Since a Fund starts each trading day with exposure which is 300% of its net assets, a change in both the exposure and the net assets of the Fund by the same absolute amount results in a change in the comparative relationship of the two. As an example (using simplified numbers), if the Fund had $100 in net assets at the market close, it would seek $300 of exposure to the next trading days Index performance. If the Index rose by 1% by noon the following trading day, the exposure of the Fund will have risen by 1% to $303 and the net assets will have risen by that $3 gain to $103. With net assets of $103 and exposure of $303, a purchaser at that point would be receiving 294% exposure of her investment instead of 300%.
Leverage Risk
If you invest in the Fund, you are exposed to the risk that a decline in the daily performance of the Index will be leveraged. This means that your investment in the Fund will be reduced by an amount equal to 3% for every 1% daily decline, not including the cost of financing the portfolio and the impact of operating expenses, which would further lower your investment. The Fund could theoretically lose an amount greater than its net assets in the event of an Index decline of more than 33%. Further, purchasing shares during a day may result in greater than 300% exposure to the performance of the Index if the Index declines between the close of the markets on one trading day and before the close of the markets on the next trading day.
To fully understand the risks of using leverage in the Fund, see Effects of Compounding and Market Volatility Risk above.
Liquidity Risk
Some securities held by the Fund, including derivatives, may be difficult to sell or illiquid, particularly during times of market turmoil. Illiquid securities also may be difficult to value. If the Fund is forced to sell an illiquid security at an unfavorable time or at a price that is lower than Raffertys judgment of the securitys true market value, the Fund may be forced to sell the security at a loss. Such a situation may prevent the Fund from limiting losses, realizing gains or achieving a high correlation with the Index.
Market Risk
The Fund is subject to market risks that can affect the value of its shares. These risks include political, regulatory, market and economic developments, including developments that impact specific economic sectors, industries or segments of the market.
Market Timing Risk
Rafferty expects a significant portion of the assets of the Fund to come from professional money managers and investors who use the Funds as part of asset allocation and market timing investment strategies. These strategies often call for frequent trading which may lead to increased portfolio turnover, higher transaction costs, and the possibility of increased capital gains, including short-term and/or long-term capital gain that will be taxable to shareholders as ordinary income.
54 | DIREXION SHARES ETF TRUST PROSPECTUS |
Mexican Securities Risk
Investment in securities of Mexican issuers involves risks that may be greater than if the Funds investments were more geographically diverse. Mexicos economy is heavily dependent on trading with key partners. Any increases or decreases in the volume of this trading, changes in taxes or tariffs, or variance in political relationships between those nations may impact the Mexican economy overall in a way that would be adverse to the Funds investments. Additionally, investment in Mexico may be subject to any positive or adverse effects of the varyingnature of its economic landscape with respect to expropriation and/or nationalization of assets, strengthened or lessened restrictions on and government intervention in international trade, confiscatory taxation, political instability, including authoritarian and/or military involvement in governmental decision making, armed conflict, the impact on the economy as a result of civil war and social instability as a result of religious, ethnic and/or socioeconomic unrest.
Non-Diversification Risk
The Fund is non-diversified, which means it invests a high percentage of its assets in a limited number of securities. A non-diversified funds NAV and total return may fluctuate more or fall greater in times of weaker markets than a conventional diversified fund.
Regulatory Risk
The Fund is subject to the risk that a change in U.S. law and related regulations will impact the way the Fund operates, increase the particular costs of the Funds operations and/or change the competitive landscape.
Risks of Investing in Other Investment Companies (including ETFs)
Investments in the securities of other investment companies, including ETFs, may involve duplication of advisory fees and certain other expenses. Fund shareholders indirectly bear the Funds proportionate share of the fees and expenses indirectly paid by shareholders of the other investment company or ETF, in addition to the fees and expenses Fund shareholders bear in connection with the Funds own operations. The Funds performance may be magnified positively or negatively by virtue of its investment in other investment companies. If the investment company or ETF fails to achieve its investment objective, the value of the Funds investment will decline, adversely affecting the Funds performance. In addition, closed end investment company and ETF shares potentially may trade at a discount or a premium and are subject to brokerage and other trading costs, which could result in greater expenses to the Fund. Finally, because the value of ETF shares depends on the demand in the market, the Adviser may not be able to liquidate the Funds holdings in those shares at the most optimal time, adversely affecting the Funds performance.
Small and Mid Capitalization Company Risk
Investing in the securities of small and/or mid capitalization companies, and securities that provide exposure to small and/or mid capitalization companies, involves greater risks and the possibility of greater price volatility than investing in more-established, larger capitalization companies. Small and mid capitalization companies often have narrower markets for their goods and/or services and more limited managerial and financial resources than larger, more established companies. Furthermore, those companies often have limited product lines, services, markets, financial resources or are dependent on a small management group. In addition, because these stocks are not well-known to the investing public, do not have significant institutional ownership and are followed by relatively few security analysts, there will normally be less publicly available information concerning these securities compared to what is available for the securities of larger companies. Adverse publicity and investor perceptions, whether based on fundamental analysis, can decrease the value and liquidity of securities held by the Fund. As a result, their performance can be more volatile and they face greater risk of business failure, which could increase the volatility of the Funds portfolio.
Tax and Distribution Risk
The Fund has extremely high portfolio turnover which causes the Fund to generate significant amounts of taxable income. This income is typically short-term capital gain, which is generally treated as ordinary income when distributed to shareholders, or short-term capital loss. The Fund rarely generates long-term capital gain or loss. The Fund will generally need to distribute net short-term capital gain to satisfy certain tax requirements. As a result of the Funds high portfolio turnover, the Fund could make larger and/or more frequent distributions than traditional unleveraged ETFs. Because the Funds asset level changes frequently, these distributions could comprise a substantial portion or even all of the Funds net assets if the Fund distributes this income after a decline in its net assets. In addition, the Fund may be held by short-term investors and these investors may exit the Fund prior to the record date of a distribution. As a result, shareholders in the Fund on the day of a distribution may receive substantial distributions, which could lead to negative tax implications for such shareholders. Potential investors are urged to consult their own tax advisers for more detailed information.
Rules governing the federal income tax aspects of certain derivatives, including total return equity swaps, real estate-
DIREXION SHARES ETF TRUST PROSPECTUS | 55 |
related swaps, credit default swaps and other credit derivatives are not entirely clear. Because the Funds status as a regulated investment company might be affected if the Internal Revenue Service did not accept the Funds treatment of certain transactions involving derivatives, the Funds ability to engage in these transactions may be limited.
Tracking Error Risk
The Fund may have difficulty achieving its daily target due to fees and expenses, high portfolio turnover, transaction costs, and/or a temporary lack of liquidity in the markets for the securities held by the Fund. A failure to achieve a daily target may cause the Fund to provide returns for a longer period that are worse than expected. In addition, even though the Fund may meet its daily target for a period of time, this will not necessarily produce the returns that might be expected in light of the returns of the Index or the Funds benchmark for that period.
Valuation Time Risk
The Fund values its portfolio as of the close of regular trading on the New York Stock Exchange (NYSE) (generally 4:00 P.M. Eastern time). In some cases, foreign market indices close before the NYSE opens or may not be open for business on the same calendar days as the Fund. As a result, the daily performance of the Fund can vary from the performance of the Index.
Special Risks of Exchange-Traded Funds
Not Individually Redeemable. Shares are not individually redeemable and may be redeemed by the Fund at NAV only in large blocks known as Creation Units. You may incur brokerage costs purchasing enough Shares to constitute a Creation Unit.
Trading Issues. Trading in Shares on an exchange may be halted due to market conditions or for reasons that, in the view of that exchange, make trading in Shares inadvisable, such as extraordinary market volatility or other reasons. There can be no assurance that Shares will continue to meet the listing requirements of the exchange on which it trades, and the listing requirements may be amended from time to time.
Market Price Variance Risk. Individual Shares of the Fund that are listed for trading on an exchange can be bought and sold in the secondary market at market prices. The market prices of Shares will fluctuate in response to changes in NAV and supply and demand for Shares. The Adviser cannot predict whether Shares will trade above, below or at their NAV. Differences between secondary market prices and NAV for Shares may be due largely to supply and demand forces in the secondary market, which forces may not be the same as those influencing prices for securities or instruments held by the Fund at a particular time. Given the fact that Shares can be created and redeemed in Creation Units, the Adviser believes that large discounts or premiums to the NAV of Shares should not be sustained. There may, however, be times when the market price and the NAV vary significantly and you may pay more than NAV when buying Shares on the secondary market, and you may receive less than NAV when you sell those Shares. The market price of Shares, like the price of any exchange-traded security, includes a bid-ask spread charged by the exchange specialists, market makers or other participants that trade the particular security. In times of severe market disruption, the bid-ask spread often increases significantly. This means that Shares may trade at a discount to NAV and the discount is likely to be greatest when the price of Shares is falling fastest, which may be the time that you most want to sell your Shares. The Funds investment results are measured based upon the daily NAV of the Fund over a period of time. Investors purchasing and selling Shares in the secondary market may not experience investment results consistent with those experienced by those creating and redeeming directly with the Fund. There is no guarantee that an active secondary market will develop for Shares of the Fund.
Fund Performance
The Fund has not yet commenced operations; therefore, performance information is not yet available. In the future, performance information for the Fund will be presented in this section. Performance information also will be available on the Funds website at http://www.direxionfunds.com/products?presets=etfs&activetab=performance or by calling the Fund toll free at 1-866-476-7523.
Management
Investment Adviser
Rafferty Asset Management, LLC is the Funds investment adviser.
Portfolio Manager
Paul Brigandi, the Funds Portfolio Manager, is primarily responsible for the day-to-day management of the Fund and has served in this role since the Funds inception.
Purchase and Sale of Fund Shares
The Fund will issue and redeem Shares only to Authorized Participants (typically, broker-dealers) in exchange for the deposit or delivery of a basket of assets (securities and/or cash) in large blocks, known as Creation Units, each of which is comprised of 50,000 Shares. Retail investors may only purchase and sell Fund Shares on a national securities exchange through a broker-dealer. Because the Shares trade at market prices rather than NAV, Shares may trade at a price greater than NAV (premium) or less than NAV (discount).
56 | DIREXION SHARES ETF TRUST PROSPECTUS |
Tax Information
The Fund intends to make distributions that may be taxed as ordinary income or long-term capital gains. Those distributions will be subject to federal income taxes and may also be subject to state and local taxes. Distributions by the Fund may be significantly higher than those of most exchange-traded funds.
Payments to Broker-Dealers and Other Financial Intermediaries
If you purchase the Fund through a broker-dealer or other financial intermediary (such as a bank or financial advisor), the Fund and/or the Adviser may pay the intermediary for the sale of Fund shares and related services. These payments may create a conflict of interest by influencing the broker-dealer or other financial intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your financial intermediarys website for more information.
DIREXION SHARES ETF TRUST PROSPECTUS | 57 |
Direxion Daily Mexico Bear 3X Shares
Important Information Regarding the Fund
The Direxion Daily Mexico Bear 3X Shares (Fund) seeks daily leveraged investment results. The pursuit of daily leveraged goals means that the Fund is riskier than alternatives that do not use leverage because the Funds objective is to magnify the performance of an index. The pursuit of daily leveraged investment goals means that the return of the Fund for a period longer than a full trading day may bear no resemblance to 300% of the return of its index for such longer period because the aggregate return of the Fund is the product of the series of daily leveraged returns for each trading day. The path of the benchmark during the longer period may be at least as important to the Funds return for the longer period as the cumulative return of the benchmark for the relevant longer period, especially in periods of market volatility. Further, the return for investors that invest for periods less than a full trading day or for a period different than a trading day will not be the product of the return of the Funds stated goal and the performance of the target index for the full trading day.
Investment Objective
The Fund seeks daily investment results, before fees and expenses, of 300% of the inverse (or opposite) of the performance of the MSCI Mexico IMI 25/50 Index. The Fund seeks daily leveraged investment results and does not seek to achieve its stated investment objective over a period of time greater than one day. The Fund is different and much riskier than most exchange-traded funds.
The Fund is designed to be utilized only by knowledgeable investors who understand the potential consequences of seeking daily leveraged investment results, understand the risks associated with shorting and the use of leverage, and are willing to monitor their portfolios frequently. The Fund seeks daily leveraged investment results relative to the Index and is different and riskier than similarly benchmarked exchange-traded funds that do not use leverage. Therefore, the Fund is not intended to be used by, and is not appropriate for, investors who do not intend to actively monitor and manage their portfolios.
Fees and Expenses of the Fund
This table describes the fees and expenses that you may pay if you buy or hold shares of the Fund (Shares). Investors purchasing shares in the secondary market may pay costs (including customary brokerage commissions) charged by their broker.
Annual Fund Operating Expenses (1) (expenses that you pay each year as a percentage of the value of your investment)
Management Fees |
0.75% | |||
Distribution and/or Service (12b-1) Fees |
0.00% | |||
Other Expenses of the Fund |
0.25% | |||
Acquired Fund Fees and Expenses |
0.15% | |||
|
|
|||
Total Annual Fund Operating Expenses |
1.15% | |||
Expense Cap/Reimbursement |
(0.05% | ) | ||
|
|
|||
Total Annual Fund Operating Expenses After
|
1.10% | |||
|
|
(1) |
The Funds adviser, Rafferty Asset Management, LLC (Rafferty or the Adviser) has contractually agreed to cap all or a portion of its management fee and/or reimburse the Fund for Other Expenses through March 1, 2015, to the extent that the Funds Total Annual Operating Expenses exceed 0.95% (excluding, as applicable, among other expenses, taxes, leverage interest, Acquired Fund Fees and Expenses, dividends or interest on short positions, other interest expenses, brokerage commissions, expenses incurred in connection with any merger or reorganization and extraordinary expenses such as litigation). Any expense cap is subject to reimbursement by the Fund within the following three years only if overall expenses fall below these percentage limitations. This agreement may be terminated or revised at any time with the consent of the Board of Trustees. |
Expense Example
This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund for the time periods indicated and then redeem all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Funds operating expenses remain the same. Although your actual costs may be higher or lower, based on these assumptions your costs would be:
1 Year | 3 Years | |
|
||
$112 | $360 |
Portfolio Turnover
The Fund pays transaction costs, such as commissions, when it buys and sells securities (or turns over its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in a taxable account. These costs, which are not reflected in Annual Fund Operating Expenses or in the example, affect the Funds performance.
Principal Investment Strategies
The Fund, under normal circumstances, creates short positions by investing at least 80% of its assets in: futures
58 | DIREXION SHARES ETF TRUST PROSPECTUS |
contracts; options on securities, indices and futures contracts; equity caps, floors and collars; swap agreements; forward contracts; short positions; reverse repurchase agreements; exchange-traded funds (ETFs); and other financial instruments that, in combination, provide leveraged and unleveraged exposure to the MSCI Mexico IMI 25/50 Index (Index). The Fund invests the remainder of its assets in short-term debt instruments that have terms-to-maturity of less than 397 days and exhibit high quality credit profiles, including U.S. government securities and repurchase agreements. The Fund does not invest in equity securities.
Mexico is considered an emerging market, as that term is defined by the index provider. The determination that Mexico is an emerging market is based on it being an economy that is in the initial stages of industrialization and has been historically marked by low per capita income and lack of capital market transparency, but appears to be implementing political and/or market reforms resulting in greater capital market transparency, increased access for foreign investors and generally improved economic conditions. Emerging markets have the potential for significantly higher or lower rates of return and carry greater risks than more developed economies.
The Index is designed to measure the performance of the large, mid and small cap segments of the Mexican equity market, covering approximately 99% of the free float-adjusted market capitalization in Mexico. As of the date of its last reconstitution, the Index had a total dollar value of approximately $198.1 billion, composed of 47 constituent securities ranging in market capitalization from approximately $76.9 million to $37.8 billion. Additionally, as of May 31, 2013, the Index is concentrated in the consumer staples sector, but this concentration may change in the future based on the Indexs methodology and the varying nature of Mexicos economy.
The Index applies certain screens and weightings to take into account the investment limits placed on regulated investment companies (RICs) under federal tax regulations. One such requirement is that at the end of each quarter of a RICs tax year, no more than 25% of its assets may be invested in a single issuer and the sum of the weights of all issuers representing more than 5% of the RIC should not exceed 50% of its total assets. The Index aims to reflect these requirements in the selection and weighting of its component securities.
The Fund may gain exposure to only a representative sample of the securities in the Index that have aggregate characteristics similar to those of the Index. The Fund gains this exposure by investing in a combination of financial instruments that, in combination, provide exposure to the underlying securities of the Index. The Fund seeks to remain fully invested at all times consistent with its stated goal. At the close of the markets each trading day, Rafferty positions the Funds portfolio so that its exposure to the Index is consistent with the Funds investment objective. The impact of the Indexs movements during the day will affect whether the Funds portfolio needs to be re-positioned. For example, if the Index has fallen on a given day, net assets of the Fund should rise, meaning that the Funds exposure will need to be increased. Conversely, if the Index has risen on a given day, net assets of the Fund should fall, meaning the Funds exposure will need to be reduced. This re-positioning strategy typically results in high portfolio turnover.
Because of daily rebalancing and the compounding of each days return over time, the return of the Fund for periods longer than a single day will be the result of each days returns compounded over the period, which will very likely differ from 300% of the return of the Index over the same period. The Fund will lose money if the Index performance is flat over time, and as a result of daily rebalancing, the Indexs volatility and the effects of compounding, it is even possible that the Fund will lose money over time while the Indexs performance decreases.
Additionally, because a significant portion of the assets of the Fund may come from investors using asset allocation and market timing investment strategies, the Fund may further need to engage in frequent trading. The Fund will concentrate its investment in a particular industry or group of industries to approximately the same extent as the Index is so concentrated.
Principal Risks
An investment in the Fund entails risk. The Fund could lose money or its performance could trail that of other investment alternatives. The Adviser cannot guarantee that the Fund will achieve its objective. In addition, the Fund presents some risks not traditionally associated with most mutual funds and exchange-traded funds. It is important that investors closely review all of the risks listed below and understand how these risks interrelate before making an investment in the Fund. Turbulence in financial markets and reduced liquidity in equity, credit and fixed income markets could negatively affect issuers worldwide, including the Fund. There is the risk that you could lose all or a portion of your money invested in the Fund.
Adverse Market Conditions Risk
Because the Fund magnifies the inverse performance of the Index, its performance will suffer during conditions in which the Index rises.
Advisers Investment Strategy Risk
The Adviser utilizes a quantitative methodology to select investments for the Fund. Although this methodology is designed to correlate the Funds performance with the
DIREXION SHARES ETF TRUST PROSPECTUS | 59 |
performance of the Index, there is no assurance that such methodology will be successful and will enable the Fund to achieve its investment objective.
Cash Transaction Risk
Unlike most ETFs, the Fund currently intends to effect creations and redemptions principally for cash, rather than principally for in-kind securities, because of the nature of the financial instruments held by the Fund. As such, investments in Shares may be less tax efficient than investments in conventional ETFs.
Concentration Risk
The Index is concentrated in the consumer staples sector, however, in the future, the Index concentration may change. The Fund will concentrate its investments in a particular industry or group of industries to approximately the same extent as the Index is so concentrated. The performance of the Fund may be more volatile than a fund that does not concentrate its investments in a specific industry or group of industries. The Fund also may be more susceptible to any single economic market, political or regulatory occurrence affecting that industry or group of industries. However, the Fund only may concentrate its investments ( i.e. , hold 25% or more of its total assets in the stocks of a particular industry or group of industries) to approximately the same extent that its underlying index concentrates in the stocks of a particular industry or group of industries. For purposes of this limitation, securities of the U.S. Government (including its agencies and instrumentalities), repurchase agreements collateralized by U.S. Government securities, and securities of state or municipal governments and their political subdivisions are not considered to be issued by members of any industry.
Consumer Staples Sector Risk
The Fund currently focuses its investments in securities issued by, and/or has exposure to, companies in the consumer staples sector. The consumer staples sector may be affected by the permissibility of using various food additives and production methods, changing consumer tastes, marketing campaigns and other factors affecting consumer demand. In particular, tobacco companies may be adversely affected by new laws, regulations and litigation. The consumer staples sector may also be adversely affected by changes or trends in commodity prices, which may be influenced or characterized by unpredictable factors.
Counterparty Risk
The Fund may invest in financial instruments involving counterparties for the purpose of attempting to gain exposure to a particular group of securities or an asset class without actually purchasing those securities or investments, or to hedge a position. These financial instruments may include swap agreements. The use of swap agreements and other counterparty instruments involves risks that are different from those associated with ordinary portfolio securities transactions. For example, the Fund bears the risk of loss of the amount expected to be received under a swap agreement in the event of the default or bankruptcy of a swap agreement counterparty. Swap agreements and other counterparty instruments also may be considered to be illiquid. In addition, the Fund may enter into swap agreements that involve a limited number of counterparties, which may increase the Funds exposure to counterparty credit risk. The Fund does not specifically limit its counterparty risk with respect to any single counterparty. Further, there is a risk that no suitable counterparties will be willing to enter into, or continue to enter into, transactions with the Fund and, as a result, the Fund may not be able to achieve its investment objective.
Currency Exchange Rate Risk
Changes in foreign currency exchange rates will affect the value of what the Fund owns and the Funds share price. Generally, when the U.S. dollar rises in value against a foreign currency, an investment in that country loses value because that currency is worth fewer U.S. dollars. Devaluation of a currency by a countrys government or banking authority also will have a significant impact on the value of any investments denominated in that currency. Currency markets generally are not as regulated as securities markets.
Daily Correlation Risk
There is no guarantee that the Fund will achieve a high degree of correlation to the Index and therefore achieve its daily investment objective. To achieve a high degree of correlation with the Index, the Fund seeks to rebalance its portfolio daily to keep leverage consistent with its daily target. The Fund may have difficulty achieving its daily target due to fees and expenses, high portfolio turnover, transaction costs and costs associated with the use of leveraged investment techniques and/or a temporary lack of liquidity in the markets for the securities held by the Fund. Market disruptions, regulatory restrictions or extreme volatility will also adversely affect the Funds ability to adjust exposure to the required levels. The Fund may not have investment exposure to all securities in its underlying Index, or its weighting of investment exposure to such stocks or industries may be different from that of the Index. In addition, the Fund may invest in securities or financial instruments not included in the underlying Index. The Fund may be subject to large movements of assets into and out of the Fund, potentially resulting in the Fund being over- or under-exposed to its Index. In addition, the target amount of
60 | DIREXION SHARES ETF TRUST PROSPECTUS |
portfolio exposure to the Index is impacted dynamically by the Indexs movement. Because of this, it is unlikely that the Fund will be perfectly exposed to the Index at the end of each day. The possibility of the Fund being materially over- or under-exposed to its Index increases on days when the Index is volatile near the close of the trading day. Activities surrounding annual index reconstitutions and other index rebalancing or reconstitution events may hinder the Funds ability to meet its daily investment objective on that day.
Derivatives Risk
The Fund uses investment techniques, including investments in derivatives such as futures and forward contracts, options and swaps, which may be considered aggressive. Investments in such derivatives are subject to market risks that may cause their prices to fluctuate over time and may increase the volatility of the Fund. The use of derivatives may expose the Fund to additional risks that it would not be subject to if it invested directly in the securities underlying those derivatives, such as counterparty risk and the risk that the derivatives may become illiquid. The use of derivatives may result in larger losses or smaller gains than otherwise would be the case. Additionally, with respect to the use of swap agreements, if the Index has a dramatic intraday move in value that causes a material decline in the Funds net asset value (NAV), the terms of the swap agreement between the Fund and its counterparty may allow the counterparty to immediately close out of the transaction with the Fund. In such circumstances, the Fund may be unable to enter into another swap agreement or invest in other derivatives to achieve the desired exposure consistent with the Funds daily investment objective. This may prevent the Fund from achieving its daily investment objective particularly if the Index reverses all or a portion of its intraday move by the end of the day. In addition, the Funds investments in derivatives, as of the date of this Prospectus, are subject to the following risks:
Futures and Forward Contracts . There may be an imperfect correlation between the changes in market value of the securities held by the Fund and the prices of futures contracts. There may not be a liquid secondary market for the futures contracts. Forward currency transactions include the risks associated with fluctuations in currency.
Options . There may be an imperfect correlation between the prices of options and movements in the price of the securities (or indices) hedged or used for cover, which may cause a given hedge not to achieve its objective.
Swap Agreements . Interest rate swaps are subject to interest rate and credit risk. Total return swaps are subject to counterparty risk, which relates to credit risk of the counterparty and liquidity risk of the swaps themselves.
Early Close/Trading Halt Risk
An exchange or market may close or issue trading halts on specific securities, or the ability to buy or sell certain securities or financial instruments may be restricted, which may result in the Fund being unable to buy or sell certain securities or financial instruments. In such circumstances, the Fund may be unable to rebalance its portfolio, may be unable to accurately price its investments and/or may incur substantial trading losses.
Effects of Compounding and Market Volatility Risk
The Fund does not attempt to, and should not be expected to, provide returns which are a multiple of the return of the Index for periods other than a single day. The Fund rebalances its portfolio on a daily basis, increasing exposure in response to that days gains or reducing exposure in response to that days losses. This means that for a period longer than one day, the pursuit of daily goals may result in daily leveraged compounding. It also means that the return of an index over a period of time greater than one day multiplied by the Funds daily target (300%) generally will not equal the Funds performance over that same period.
As a result, over time, the cumulative percentage increase or decrease in the value of the Funds portfolio may diverge significantly from the cumulative percentage increase or decrease in the multiple of the return of the Funds underlying index due to the compounding effect of losses and gains on the returns of the Fund. It also is expected that the Funds use of leverage will cause the Fund to underperform the return of three times its benchmark in a trendless or flat market.
The effect of compounding becomes more pronounced on the Funds performance as the Index experiences volatility. The Indexs volatility rate is a statistical measure of the magnitude of fluctuations in the returns of the Index. The table below provides examples of how Index volatility could affect the Funds performance. The chart shows estimated Fund returns for a number of combinations of performance and volatility over a one-year period and is shown to illustrate how holding the Fund for a period longer than one day may negatively impact investment return. As shown below, this Fund, or any other 3X Bear Fund, would be expected to lose 31.3% (as shown in Table 1 below) if its Index provided no return over a one year period during which the Index experienced annualized volatility of 25%. If the Indexs annualized volatility were to rise to 75%, the hypothetical loss for a one year period for the Fund widens to approximately 96.6%.
At higher ranges of volatility, there is a chance of a near complete loss of value even if the Index is flat. For instance, if the Indexs annualized volatility is 100%, the Fund would be
DIREXION SHARES ETF TRUST PROSPECTUS | 61 |
expected to lose approximately 100% of its value, even if the cumulative Index return for the year was only 0%.
Table 1
One
Year Index Return |
300%
Return |
Volatility Rate | ||||||||||||||||||||||||
10% | 25% | 50% | 75% | 100% | ||||||||||||||||||||||
60% | 180% | 1371.5% | 973.9% | 248.6% | 46.5% | 96.1% | ||||||||||||||||||||
50% | 150% | 653.4% | 449.8% | 78.5% | 72.6% | 98.0% | ||||||||||||||||||||
40% | 120% | 336.0% | 218.2% | 3.3% | 84.2% | 98.9% | ||||||||||||||||||||
30% | 90% | 174.6% | 100.4% | 34.9% | 90.0% | 99.3% | ||||||||||||||||||||
20% | 60% | 83.9% | 34.2% | 56.4% | 93.3% | 99.5% | ||||||||||||||||||||
10% | 30% | 29.2% | 5.7% | 69.4% | 95.3% | 99.7% | ||||||||||||||||||||
0% | 0% | 5.8% | 31.3% | 77.7% | 96.6% | 99.8% | ||||||||||||||||||||
10% | 30% | 29.2% | 48.4% | 83.2% | 97.4% | 99.8% | ||||||||||||||||||||
20% | 60% | 45.5% | 60.2% | 87.1% | 98.0% | 99.9% | ||||||||||||||||||||
30% | 90% | 57.1% | 68.7% | 89.8% | 98.4% | 99.9% | ||||||||||||||||||||
40% | 120% | 65.7% | 75.0% | 91.9% | 98.8% | 99.9% | ||||||||||||||||||||
50% | 150% | 72.1% | 79.6% | 93.4% | 99.0% | 99.9% | ||||||||||||||||||||
60% | 180% | 77.0% | 83.2% | 94.6% | 99.2% | 99.9% |
The Indexs annualized historical volatility rate for the five-year period from May 30, 2008 through May 31, 2013 is 30.79%. The Indexs highest volatility rate for any one calendar year during the five-year period is 52.75% and volatility for a shorter period of time may have been substantially higher. The Indexs annualized performance for the five-year period from May 30, 2008 through May 31, 2013 is 2.89%. Historical Index volatility and performance are not indications of what the Index volatility and performance will be in the future.
For additional graphs and charts demonstrating the effects of volatility and index performance on the long-term performance of the Fund, see Additional Information Regarding Investment Techniques and Policies and Negative Implications of Daily Goals in Volatile Markets in the Funds statutory prospectus, and Special Note Regarding the Correlation Risks of the Funds in the Funds Statement of Additional Information.
Holding an unmanaged position opens the investor to the risk of market volatility adversely affecting the performance of the investment. The Fund is not appropriate for investors who do not intend to actively monitor and manage their portfolios. This table is intended to underscore the fact that the Fund is designed as a short-term trading vehicle for investors who intend to actively monitor and manage their portfolios.
To fully understand the risks of market volatility on the Fund, see Negative Implications of Daily Goals in Volatile Markets found in the statutory prospectus.
Emerging Markets Risk
Indirectly investing in emerging markets instruments involve greater risks than indirectly investing in foreign instruments in general. Risks of investing in emerging market countries include: political or social upheaval; nationalization of businesses; restrictions on foreign ownership; prohibitions on the repatriation of assets; and risks from an economys dependence on revenues from particular commodities or industries. In addition, currency transfer restrictions, limited potential buyers for such instruments, delays and disruption in settlement procedures and illiquidity or low volumes of transactions may make exits difficult or impossible at times.
Foreign Securities Risk
Indirectly investing in foreign instruments may involve greater risks than investing in domestic instruments. As a result, the Funds returns and NAVs may be affected to a large degree by fluctuations in currency exchange rates, interest rates, political, diplomatic or economic conditions and regulatory requirements in other countries. The laws and accounting, auditing, and financial reporting standards in foreign countries typically are not as strict as they are in the U.S., and there may be less public information available about foreign companies.
Gain Limitation Risk
If the Funds benchmark moves more than 33% on a given trading day in a direction adverse to the Fund, you would lose all of your money. Rafferty will attempt to position the Funds portfolio to ensure that the Fund does not lose more than 90% of its NAV on a given day. The cost of such downside protection will be limitations on the Funds gains. As a consequence, the Funds portfolio may not be responsive to Index losses beyond 30% in a given day. For example, if the Index were to lose 35%, the Fund might be limited to a daily gain of 90% rather than 105%, which is 300% of the Index loss of 35%.
Geographic Concentration Risk
Investments in a particular country or geographic region may be particularly susceptible to political, diplomatic or economic conditions and regulatory requirements. As a result, the Fund may be more volatile than a more geographically diversified fund.
High Portfolio Turnover Risk
Daily rebalancing of the Funds holdings pursuant to its daily investment objective causes a much greater number of portfolio transactions when compared to most exchange-traded funds. Such frequent and active trading leads to significantly higher transaction costs because of increased
62 | DIREXION SHARES ETF TRUST PROSPECTUS |
broker commissions resulting from such transactions. In addition, there is the possibility of significantly increased capital gains, including short-term and/or long-term capital gains that will be taxable to shareholders as ordinary income. The Fund calculates portfolio turnover without including the short term cash instruments or derivative transactions that comprise the majority of the Funds trading. As such, if the Funds extensive use of derivative instruments were reflected, the calculated portfolio turnover rate would be significantly higher.
Intra-Day Investment Risk
The Fund seeks leveraged investment results from the close of the market on a given trading day until the close of the market on the subsequent trading day. The exact exposure of an investment in the Fund intraday in the secondary market is a function of the difference between the value of the Index at the market close on the first trading day and the value of the Index at the time of purchase. The Funds gains occur as its market exposure declines and its losses are accompanied by increases in market exposure. If the Index declines, the Funds net assets will rise by an amount equal to the decline in the Funds exposure. Conversely, if the Index rises the Funds net assets will decline by the same amount as the increase in the Funds exposure. As an example (using simplified numbers), if the Fund had $100 in net assets at the market close, it would seek $300 of exposure to the next trading days Index performance. If the Index declined by 1% by noon the following trading day, the exposure of the Fund will fall by 1% to $297 and the net assets will rise by $3 to $103. With net assets of $103 and exposure of $297, a purchaser at that point would be receiving 288% exposure of her investment instead of 300%
Inverse Correlation Risk
Shareholders should lose money when the Index rises, which is a result that is the opposite from traditional funds.
Leverage Risk
If you invest in the Fund, you are exposed to the risk that an increase in the daily performance of the Index will be leveraged. This means that your investment in the Fund will be reduced by an amount equal to 3% for every 1% daily increase, not including the cost of financing the portfolio and the impact of operating expenses, which would further lower your investment. The Fund could theoretically lose an amount greater than its net assets in the event of an Index increase of more than 33%. Further, purchasing shares during a day may result in greater than 300% exposure to the performance of the Index if the Index rises between the close of the markets on one trading day and before the close of the markets on the next trading day.
To fully understand the risks of using leverage in the Fund, see Effects of Compounding and Market Volatility Risk above.
Liquidity Risk
Some securities held by the Fund, including derivatives, may be difficult to sell or illiquid, particularly during times of market turmoil. Illiquid securities also may be difficult to value. If the Fund is forced to sell an illiquid security at an unfavorable time or at a price that is lower than Raffertys judgment of the securitys true market value, the Fund may be forced to sell the security at a loss. Such a situation may prevent the Fund from limiting losses, realizing gains or achieving a high correlation with the Index.
Market Risk
The Fund is subject to market risks that can affect the value of its shares. These risks include political, regulatory, market and economic developments, including developments that impact specific economic sectors, industries or segments of the market.
Market Timing Risk
Rafferty expects a significant portion of the assets of the Fund to come from professional money managers and investors who use the Funds as part of asset allocation and market timing investment strategies. These strategies often call for frequent trading which may lead to increased portfolio turnover, higher transaction costs, and the possibility of increased capital gains, including short-term and/or long-term capital gain that will be taxable to shareholders as ordinary income.
Mexican Securities Risk
Investment in securities of Mexican issuers involves risks that may be greater than if the Funds investments were more geographically diverse. Mexicos economy is heavily dependent on trading with key partners. Any increases or decreases in the volume of this trading, changes in taxes or tariffs, or variance in political relationships between those nations may impact the Mexican economy overall in a way that would be adverse to the Funds investments. Additionally, investment in Mexico may be subject to any positive or adverse effects of the varyingnature of its economic landscape with respect to expropriation and/or nationalization of assets, strengthened or lessened restrictions on and government intervention in international trade, confiscatory taxation, political instability, including authoritarian and/or military involvement in governmental decision making, armed conflict, the impact on the economy as a result of civil war and social instability as a result of religious, ethnic and/or socioeconomic unrest.
DIREXION SHARES ETF TRUST PROSPECTUS | 63 |
Non-Diversification Risk
The Fund is non-diversified, which means it invests a high percentage of its assets in a limited number of securities. A non-diversified funds NAV and total return may fluctuate more or fall greater in times of weaker markets than a conventional diversified fund.
Regulatory Risk
The Fund is subject to the risk that a change in U.S. law and related regulations will impact the way the Fund operates, increase the particular costs of the Funds operations and/or change the competitive landscape.
Risks of Investing in Other Investment Companies (including ETFs)
Investments in the securities of other investment companies, including ETFs, may involve duplication of advisory fees and certain other expenses. Fund shareholders indirectly bear the Funds proportionate share of the fees and expenses indirectly paid by shareholders of the other investment company or ETF, in addition to the fees and expenses Fund shareholders bear in connection with the Funds own operations. The Funds performance may be magnified positively or negatively by virtue of its investment in other investment companies. If the investment company or ETF fails to achieve its investment objective, the value of the Funds investment will decline, adversely affecting the Funds performance. In addition, closed end investment company and ETF shares potentially may trade at a discount or a premium and are subject to brokerage and other trading costs, which could result in greater expenses to the Fund. Finally, because the value of ETF shares depends on the demand in the market, the Adviser may not be able to liquidate the Funds holdings in those shares at the most optimal time, adversely affecting the Funds performance.
Shorting Risk
The Fund may engage in short sales designed to earn the Fund a profit from the decline in the price of particular securities, baskets of securities or indices. However, there is a risk that the Fund will experience a loss as a result of engaging in these short sales.
Small and Mid Capitalization Company Risk
Investing in the securities of small and/or mid capitalization companies, and securities that provide exposure to small and/or mid capitalization companies, involves greater risks and the possibility of greater price volatility than investing in more-established, larger capitalization companies. Small and mid capitalization companies often have narrower markets for their goods and/or services and more limited managerial and financial resources than larger, more established companies. Furthermore, those companies often have limited product lines, services, markets, financial resources or are dependent on a small management group. In addition, because these stocks are not well-known to the investing public, do not have significant institutional ownership and are followed by relatively few security analysts, there will normally be less publicly available information concerning these securities compared to what is available for the securities of larger companies. Adverse publicity and investor perceptions, whether based on fundamental analysis, can decrease the value and liquidity of securities held by the Fund. As a result, their performance can be more volatile and they face greater risk of business failure, which could increase the volatility of the Funds portfolio.
Tax and Distribution Risk
The Fund has extremely high portfolio turnover which causes the Fund to generate significant amounts of taxable income. This income is typically short-term capital gain, which is generally treated as ordinary income when distributed to shareholders, or short-term capital loss. The Fund rarely generates long-term capital gain or loss. The Fund will generally need to distribute net short-term capital gain to satisfy certain tax requirements. As a result of the Funds high portfolio turnover, the Fund could make larger and/or more frequent distributions than traditional unleveraged ETFs. Because the Funds asset level changes frequently, these distributions could comprise a substantial portion or even all of the Funds net assets if the Fund distributes this income after a decline in its net assets. In addition, the Fund may be held by short-term investors and these investors may exit the Fund prior to the record date of a distribution. As a result, shareholders in the Fund on the day of a distribution may receive substantial distributions, which could lead to negative tax implications for such shareholders. Potential investors are urged to consult their own tax advisers for more detailed information.
Rules governing the federal income tax aspects of certain derivatives, including total return equity swaps, real estate-related swaps, credit default swaps and other credit derivatives are not entirely clear. Because the Funds status as a regulated investment company might be affected if the Internal Revenue Service did not accept the Funds treatment of certain transactions involving derivatives, the Funds ability to engage in these transactions may be limited.
Tracking Error Risk
The Fund may have difficulty achieving its daily target due to fees and expenses, high portfolio turnover, transaction costs, and/or a temporary lack of liquidity in the markets for the securities held by the Fund. A failure to achieve a daily target may cause the Fund to provide returns for a longer
64 | DIREXION SHARES ETF TRUST PROSPECTUS |
period that are worse than expected. In addition, even though the Fund may meet its daily target for a period of time, this will not necessarily produce the returns that might be expected in light of the returns of the Index or the Funds benchmark for that period.
Valuation Time Risk
The Fund values its portfolio as of the close of regular trading on the New York Stock Exchange (NYSE) (generally 4:00 P.M. Eastern time). In some cases, foreign market indices close before the NYSE opens or may not be open for business on the same calendar days as the Fund. As a result, the daily performance of the Fund can vary from the performance of the Index.
Special Risks of Exchange-Traded Funds
Not Individually Redeemable. Shares are not individually redeemable and may be redeemed by the Fund at NAV only in large blocks known as Creation Units. You may incur brokerage costs purchasing enough Shares to constitute a Creation Unit.
Trading Issues. Trading in Shares on an exchange may be halted due to market conditions or for reasons that, in the view of that exchange, make trading in Shares inadvisable, such as extraordinary market volatility or other reasons. There can be no assurance that Shares will continue to meet the listing requirements of the exchange on which it trades, and the listing requirements may be amended from time to time.
Market Price Variance Risk. Individual Shares of the Fund that are listed for trading on an exchange can be bought and sold in the secondary market at market prices. The market prices of Shares will fluctuate in response to changes in NAV and supply and demand for Shares. The Adviser cannot predict whether Shares will trade above, below or at their NAV. Differences between secondary market prices and NAV for Shares may be due largely to supply and demand forces in the secondary market, which forces may not be the same as those influencing prices for securities or instruments held by the Fund at a particular time. Given the fact that Shares can be created and redeemed in Creation Units, the Adviser believes that large discounts or premiums to the NAV of Shares should not be sustained. There may, however, be times when the market price and the NAV vary significantly and you may pay more than NAV when buying Shares on the secondary market, and you may receive less than NAV when you sell those Shares. The market price of Shares, like the price of any exchange-traded security, includes a bid-ask spread charged by the exchange specialists, market makers or other participants that trade the particular security. In times of severe market disruption, the bid-ask spread often increases significantly. This means that Shares may trade at a discount to NAV and the discount is likely to be greatest when the price of Shares is falling fastest, which may be the time that you most want to sell your Shares. The Funds investment results are measured based upon the daily NAV of the Fund over a period of time. Investors purchasing and selling Shares in the secondary market may not experience investment results consistent with those experienced by those creating and redeeming directly with the Fund. There is no guarantee that an active secondary market will develop for Shares of the Fund.
Fund Performance
The Fund has not yet commenced operations; therefore, performance information is not yet available. In the future, performance information for the Fund will be presented in this section. Performance information also will be available on the Funds website at http://www.direxionfunds.com/products?presets=etfs&activetab=performance or by calling the Fund toll free at 1-866-476-7523.
Management
Investment Adviser
Rafferty Asset Management, LLC is the Funds investment adviser.
Portfolio Manager
Paul Brigandi, the Funds Portfolio Manager, is primarily responsible for the day-to-day management of the Fund and has served in this role since the Funds inception.
Purchase and Sale of Fund Shares
The Fund will issue and redeem Shares in exchange for cash only to Authorized Participants in large blocks, known as Creation Units, each of which is comprised of 50,000 Shares. Retail investors may only purchase and sell Fund Shares on a national securities exchange through a broker-dealer. Because the Shares trade at market prices rather than NAV, Shares may trade at a price greater than NAV (premium) or less than NAV (discount).
Tax Information
The Fund intends to make distributions that may be taxed as ordinary income or long-term capital gains. Those distributions will be subject to federal income taxes and may also be subject to state and local taxes. Distributions by the Fund may be significantly higher than those of most exchange-traded funds.
Payments to Broker-Dealers and Other Financial Intermediaries
If you purchase the Fund through a broker-dealer or other financial intermediary (such as a bank or financial advisor), the Fund and/or the Adviser may pay the intermediary for the sale of Fund shares and related services. These payments may create a conflict of interest by influencing the broker-dealer or other financial intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your financial intermediarys website for more information.
DIREXION SHARES ETF TRUST PROSPECTUS | 65 |
The Direxion Shares ETF Trust (Trust) is a registered investment company offering a number of separate exchange-traded funds (ETFs). Rafferty Asset Management, LLC (Rafferty, or Adviser) serves as the investment adviser to each Fund. This Prospectus describes the exchange-traded funds (each a Fund and collectively, the Funds) noted below of the Trust.
The shares of certain of the Funds (Shares) are, or will be, listed on NYSE Arca, Inc. (the Exchange). When the Shares are listed and traded on the Exchange, the market prices for the Shares may be different from the intra-day value of the Shares disseminated by the Exchange and from their net asset value (NAV). Unlike conventional mutual funds, Shares are not individually redeemable securities. Rather, each Fund issues and redeems Shares on a continuous basis at NAV only in large blocks of Shares called Creation Units. A Creation Unit consists of 50,000 Shares. Creation Units of the 3X Bull Funds are issued and redeemed in cash and/or in-kind for securities included in the relevant underlying index. Creation Units of the 3X Bear Funds are issued and redeemed for cash.
Shares may only be purchased from or redeemed with the Funds in Creation Units. As a result, retail investors generally will not be able to purchase or redeem Shares directly from or with the Funds. Most retail investors will purchase or sell Shares in the secondary market with the assistance of a broker. Thus, some of the information contained in this prospectus, such as information about purchasing and redeeming Shares from or with a Fund and all references to the transaction fee imposed on purchases and redemptions, is not relevant to retail investors.
The Funds seek a multiple of 300% of the total return, or inverse return, of their benchmark indices on a given day. The Funds seek to provide daily leveraged investment results, before fees and expenses, which correspond to the performance of a particular index or benchmark.
As used in this prospectus, the terms daily, day, and trading day, refer to the period from the close of the markets one trading day to the close of the markets on the next trading day. The Funds with the word Bull in their name (collectively, the 3X Bull Funds) attempt to provide investment results that correlate positively to the return of an index or benchmark, meaning the 3X Bull Funds attempt to move in the same direction as the target index or benchmark. The Funds with the word Bear in their name (collectively, the 3X Bear Funds) attempt to provide investment results that correlate negatively to the return of an index or benchmark, meaning that the 3X Bear Funds attempt to move in the opposite or inverse direction of the target index or benchmark. The correlations sought by the 3X Bull Funds and the 3X Bear Funds are generally a multiple of the returns of the target index or benchmark. For example, the benchmark for the Direxion Daily Chile Bull 3X Shares is 300% of the daily total return of the performance of the MSCI Chile IMI 25/50 Index, while the benchmark for the Direxion Daily Chile Bear 3X Shares is 300% of the inverse, or opposite, of the daily total return of the performance of the MSCI Chile IMI 25/50 Index. If, on a given day, the MSCI Chile IMI 25/50 Index gains 1%, the Direxion Daily Chile Bull 3X Shares is designed to gain approximately 3% (which is equal to 300% of 1%), while the Direxion Daily Chile Bear 3X Shares is designed to lose approximately 3%. Conversely, if the MSCI Chile IMI 25/50 Index loses 1% on a given day, the Direxion Daily Chile Bull 3X Shares is designed to lose approximately 3%, while the Direxion Daily Chile Bear 3X Shares is designed to gain approximately 3% (which is equal to 300% of the 1% index loss).
Fund | Index | Daily Target | ||||
Direxion Daily Chile Bull 3X Shares Direxion Daily Chile Bear 3X Shares |
MSCI Chile IMI 25/50 Index |
|
300%
300% |
|
||
Direxion Daily Hong Kong Bull 3X Shares Direxion Daily Hong Kong Bear 3X Shares |
MSCI Hong Kong Index |
|
300%
300% |
|
||
Direxion Daily Japan Bull 3X Shares Direxion Daily Japan Bear 3X Shares |
MSCI Japan Index |
|
300%
300% |
|
||
Direxion Daily Mexico Bull 3X Shares Direxion Daily Mexico Bear 3X Shares |
MSCI Mexico IMI 25/50 Index |
|
300%
300% |
|
To pursue these results, the Funds listed above use aggressive investment techniques such as engaging in futures, swaps and options transactions. As a result, the Funds are designed to be utilized only by knowledgeable investors who understand the potential consequences of seeking daily and daily leveraged investment results, understand the risks associated with the Funds use of leverage and are willing to monitor their portfolios frequently. The Funds are not intended to be used by, and are not appropriate for, investors who do not intend to actively monitor and manage their portfolios. There is no assurance that any Fund will achieve its objective and an investment in a Fund could lose money. No single Fund is a complete investment program.
Changes in Investment Objective. Each Funds investment objective is not a fundamental policy and may be changed by the Funds Board of Trustees without shareholder approval.
66 | DIREXION SHARES ETF TRUST PROSPECTUS |
Rafferty, the investment adviser to the Funds, uses a number of investment techniques in an effort to achieve the stated goal for each Fund. The Funds each seek a multiple of 300% of the return of their benchmark indices on a given day. For the 3X Bull Funds, Rafferty attempts to magnify the returns of a 3X Bull Funds index or benchmark for a one-day period. The 3X Bear Funds are managed to provide returns inverse (or opposite) by a defined percentage to the return of a 3X Bear Funds index or benchmark for a one-day period.
Rafferty creates net long positions for the 3X Bull Funds and net short positions for the 3X Bear Funds. (Rafferty may create short positions in 3X Bull Funds and long positions in the 3X Bear Funds even though the net exposure in the 3X Bull Funds will be long and the net exposure in the 3X Bear Funds will be short.) Long positions move in the same direction as their index or benchmark, advancing when the index or benchmark advances and declining when the index or benchmark declines. Short positions move in the opposite direction of the index or benchmark, advancing when the index or benchmark declines and declining when the index or benchmark advances. Additionally, none of the Funds seek income that is exempt from federal, state or local income taxes.
In seeking to achieve each Funds investment objective, Rafferty uses statistical and quantitative analysis to determine the investments each Fund makes and the techniques it employs. Rafferty relies upon a pre-determined model to generate orders that result in repositioning each Funds investments in accordance with its daily investment objective. Using this approach, Rafferty determines the type, quantity and mix of investment positions that it believes in combination should produce daily returns consistent with a Funds objective. In general, if a Fund is performing as designed, the return of the index or benchmark will dictate the return for that Fund. Each Fund pursues its investment objective regardless of the market conditions and does not take defensive positions.
Each Fund has a clearly articulated goal which requires the Fund to seek economic exposure in excess of its net assets. To meet its objectives, each Fund invests in some combination of financial instruments so that it generates economic exposure consistent with the Funds investment objective.
Each Fund offered in this prospectus significantly invests in: futures contracts; options on securities, indices and futures contracts; equity caps, floors and collars; swap agreements; forward contracts; short positions; reverse repurchase agreements; ETFs; and other financial instruments. In addition, Rafferty uses these types of investments for the Funds to produce economically leveraged investment results. Leveraging allows Rafferty to generate a greater positive or negative return for the Funds than what would be generated on the invested capital without leverage, thus changing small market movements into larger changes in the value of the investments of a Fund.
The 3X Bull Funds generally may hold a representative sample of the securities in its benchmark index. The sampling of securities that is held by a Fund is intended to maintain high correlation with, and similar aggregate characteristics ( e.g. , market capitalization and industry weightings) to, the benchmark index. A Fund also may invest in securities that are not included in the index or may overweight or underweight certain components of the index. Certain Funds assets may be concentrated in an industry or group of industries to the extent that the Funds benchmark index concentrates in a particular industry or group of industries. In addition, each Fund offered in this prospectus is non-diversified, which means that it may invest in the securities of a limited number of issuers.
At the close of the markets each trading day, each Fund will position its portfolio to ensure that the Funds exposure to its benchmark is consistent with the Funds stated goals. The impact of market movements during the day determines whether a portfolio needs to be repositioned. If the target index has risen on a given day, a 3X Bull Funds net assets should rise, meaning their exposure may need to be increased. Conversely, if the target index has fallen on a given day, a 3X Bull Funds net assets should fall, meaning their exposure may need to be reduced. If the target index has risen on a given day, a 3X Bear Funds net assets should fall, meaning its exposure may need to be reduced. If the target index has fallen on a given day, a 3X Bear Funds net assets should rise, meaning its exposure may need to be increased. Any of the Funds portfolios may also need to be changed to reflect changes in the composition of their index. Rafferty increases a Funds exposure when its assets rise and reduces a Funds exposure when its assets fall.
The Funds are designed to provide daily leveraged investment returns, before fees and expenses, that are a multiple of the returns of their indices or benchmarks. While Rafferty attempts to minimize any tracking error (the statistical measure of the difference between the investment results of a Fund and the performance of its index or benchmark), certain factors will tend to cause a Funds investment results to vary from the stated objective. A Fund may have difficulty in achieving its daily target due to fees and expenses, high portfolio turnover, transaction costs, significant purchase and redemption activity by Fund shareholders and/or a temporary lack of liquidity in the markets for the securities held by the Fund.
DIREXION SHARES ETF TRUST PROSPECTUS | 67 |
Seeking daily leveraged investment results provides potential for greater gains and losses for the Funds relative to benchmark performance. For instance, the Direxion Daily Chile Bull 3X Shares seeks to provide, before fees and expenses, 300% of the daily return of the MSCI Chile IMI 25/50 Index. If the MSCI Chile IMI 25/50 Index gains 2% on a given day, the Direxion Daily Chile Bull 3X Shares would be expected to gain about 6%. Conversely, if the MSCI Chile IMI 25/50 Index declines 2% on a given day, the Direxion Daily Chile Bull 3X Shares would be expected to lose about 6%. However, for a period longer than one day, the pursuit of daily goals may result in daily leveraged compounding for the Funds, which means that the return of an index over a period of time greater than one day multiplied by the Funds daily target ( e.g., 300% or 300%) generally will not equal a Funds performance over that same period. Consider the following examples:
Mary is considering investments in two Funds, Funds A, and B. Fund A is a traditional index ETF which seeks (before fees and expenses) to match the performance of the XYZ index. Fund B is a leveraged ETF and seeks daily leveraged investment results (before fees and expenses) that correspond to 300% of the daily performance of the XYZ index.
On Day 1, the XYZ index increases in value from $100 to $105, a gain of 5%. On Day 2, the XYZ index declines from $105 back to $100, a loss of 4.76%. In the aggregate, the XYZ index has not moved.
An investment in Fund A would be expected to gain 5% on Day 1 and lose 4.76% on Day 2 to return to its original value. The following example assumes a $100 investment in Fund A when the index is also valued at $100:
Day |
Index
Value |
Index
Performance |
Value of
Investment |
|||||||||
$ | 100.00 | $ | 100.00 | |||||||||
1 |
$ | 105.00 | 5.00% | $ | 105.00 | |||||||
2 |
$ | 100.00 | 4.76% | $ | 100.00 |
The same $100 investment in Fund B, however, would be expected to gain in value on Day 1 but decline in value on Day 2.
The $100 investment in Fund B would be expected to gain 15% on Day 1 (300% of 5%) but decline 14.28% on Day 2.
Day |
Index
Performance |
300% of Index Performance |
Value of
Investment |
|||||||||
$ | 100.00 | |||||||||||
1 |
5.00% | 15.0% | $ | 115.00 | ||||||||
2 |
4.76% | 14.28% | $ | 98.57 |
Although the percentage decline in Fund B is smaller on Day 2 than the percentage gain on Day 1, the loss is applied to a higher principal amount, so the investment in Fund B experiences a loss even when the aggregate index value for the two-day period has not declined. (These calculations do not include the charges for expense ratio and financing charges.)
As you can see, an investment in Fund B has additional risks due to the effects of leverage and compounding.
The Funds are ETFs that seek daily leveraged investment results. The Funds are intended to be used as short-term trading vehicles. The Funds are not intended to be used by, and are not appropriate for, investors who do not intend to actively monitor and manage their portfolios. The Funds are very different from most mutual funds and ETFs. First, the Funds pursue daily leveraged investment goals, which means that the Funds are riskier than alternatives that do not use leverage because the Funds magnify the performance of the benchmark of an investment. Second, each 3X Bear Fund pursues investment goals which are inverse to the performance of its benchmark, a result opposite of most mutual funds and ETFs. Third, the Funds seek daily leveraged investment results. An investor who purchases shares of a Fund intra-day will generally receive more, or less, than 300% exposure to the target index from that point until the end of the trading day. The actual exposure is a function of the performance of the benchmark from the end of the prior trading day. If a Funds shares are held for a period longer than a single trading day, the Funds performance is likely to deviate from the multiple of the benchmark performance for the longer period. This deviation will increase with higher index volatility and longer holding periods. As a consequence, investors should not plan to hold the Funds unmonitored for periods longer than a single trading day. Further, the return for investors that invest for periods less than a full trading day or for a period different than a trading day will not be the product of the return of the Funds stated goal and the performance of the target index for the full trading day. The Funds are not suitable for all investors.
For investments held for longer than a trading day, volatility in the performance of the benchmark from day to day is the primary cause of any disparity between a Funds actual returns, the product of the Funds beta and the returns of the benchmark for such longer period. Volatility causes such disparity because it exacerbates the effects of compounding on a Funds returns. In addition, the effects of volatility are magnified in the Funds due to leverage. For example, consider the following three examples that demonstrate the effect of volatility on a hypothetical Fund:
Example 1 Benchmark Index Experiences Low Volatility
Mary invests $10.00 in a 3X Bull Fund at the close of trading on Day 1. During Day 2, the Funds benchmark rises from 100 to 102, a 2% gain. Marys investment rises 6% to $10.60. Mary
68 | DIREXION SHARES ETF TRUST PROSPECTUS |
holds her investment through the close of trading on Day 3, during which the Funds benchmark rises from 102 to 104, a gain of 1.96%. Marys investment rises to $11.22, a gain during Day 3 of 5.88%. For the two day period since Mary invested in the Fund, the benchmark gained 4% although Marys investment increased by 12.2%. Because the benchmark index continued to trend upwards with low volatility, Marys return closely correlates to the 300% return of the return of the index for the period.
John invests $10.00 in a 3X Bear Fund at the close of trading on Day 1. During Day 2, the Funds benchmark gains 2%, and Johns investment falls by 6% to $9.40. On Day 3, the benchmark rises by 1.96%, and Johns fund falls by 5.88% to $8.85. For the two day period the benchmark returned 4% while the fund lost 11.5%. Johns return still correlates to 300% return of the index, but not as closely as Marys investment in a 3X Bull Fund.
Example 2 Benchmark Index Experiences High Volatility
Mary invests $10.00 in a 3X Bull Fund after the close of trading on Day 1. During Day 2, the Funds benchmark rises from 100 to 102, a 2% gain, and Marys investment rises 6% to $10.60. Mary continues to hold her investment through the end of Day 3, during which the Funds benchmark declines from 102 to 98, a loss of 3.92%. Marys investment declines by 11.76%, from $10.60 to $9.35. For the two day period since Mary invested in the Fund, the Funds benchmark index lost 2% while Marys investment decreased from $10 to $9.35, a 6.47% loss. The volatility of the benchmark affected the correlation between the benchmark indexs return for the two day period and Marys return. In this situation, Mary lost more than three times the return of the benchmark index.
Conversely, John invests $10.00 in a 3X Bear Fund after the close of trading on Day 1. During Day 2, the Funds benchmark rises from 100 to 102, a 2% gain, and Johns investment falls 6% to $9.40. John continues to hold his investment through the end of Day 3, during which the Funds benchmark declines from 102 to 98, a loss of 3.92%. Johns investment rises by 11.76%, from $9.40 to $10.51. For the two day period since John invested in the Fund, the Funds benchmark index lost 2% while Johns investment increased from $10 to $10.51, a 5.06% gain. The volatility of the benchmark affected the correlation between the benchmark indexs return for the two day period and Johns return. In this situation, John gained less than three times the return of the benchmark index.
Example 3 Intra-day Investment with Volatility
The examples above assumed that Mary purchased the Fund at the close of trading on Day 1 and sold her investment at the close of trading on a subsequent day. However, if she made an investment intra-day, she would have received a beta determined by the performance of the benchmark from the end of the prior trading day until her time of purchase on the next trading day. Consider the following example.
Mary invests $10.00 in a 3X Bull Fund at 11 a.m. on Day 2. From the close of trading on Day 1 until 11 a.m. on Day 2, the index moved from 100 to 102, a 2% gain. In light of that gain, the Fund beta at the point at which Mary invests is 289%. During the remainder of Day 2, the Funds benchmark rises from 102 to 110, a gain of 7.84%, and Marys investment rises 22.7% (which is the benchmark gain of 7.84% multiplied by the 289% beta that she received) to $12.27. Mary continues to hold her investment through the close of trading on Day 2, during which the Funds benchmark declines from 110 to 90, a loss of 18.18%. Marys investment declines by 54.5%, from $12.27 to $5.58. For the period of Marys investment, the Funds benchmark declined from 102 to 90, a loss of 11.76%, while Marys investment decreased from $10.00 to $5.58, a 44% loss. The volatility of the benchmark affected the correlation between the benchmark indexs return for period and Marys return. In this situation, Mary lost more than three times the return of the benchmark index. Mary was also hurt because she missed the first 2% move of the benchmark and had a beta of 289% for the remainder of Day 2.
The Funds are designed to be utilized only by sophisticated investors, such as traders and active investors employing dynamic strategies. Such investors are expected to monitor and manage their portfolios frequently. Investors in the Funds should: (a) understand the risks associated with the use of leverage, (b) understand the consequences of seeking daily leveraged investment results, (c) understand the risk of shorting, and (d) intend to actively monitor and manage their investments. Investors who do not understand the Funds or do not intend to actively manage their funds and monitor their investments should not buy the Funds. There is no assurance that any of the Funds offered in this prospectus will achieve their objectives and an investment in any Fund could lose money. No single Fund is a complete investment program.
Market Volatility. Each Fund seeks to provide a return which is a multiple of the daily performance of its benchmark. No Fund attempts to, and no Fund should be expected to, provide returns which are a multiple of the return of the benchmark for periods other than a single day. Each Fund rebalances its portfolio on a daily basis, increasing exposure in response to that days gains or reducing exposure in response to that days losses.
Daily rebalancing will impair a Funds performance if the benchmark experiences volatility. For instance, a hypothetical 3X Bull Fund would be expected to lose 11% (as shown in Table 1 below) if its benchmark provided no return over a one year period during which its benchmark experienced annualized volatility of 20%. A hypothetical 3X Bear Fund
DIREXION SHARES ETF TRUST PROSPECTUS | 69 |
would be expected to lose 21% (as shown in Table 1 below) if its benchmark provided no return over a one year period during which its benchmark experienced annualized volatility of 20%. If the benchmarks annualized volatility were to rise to 40%, the hypothetical loss for a one year period for a 3X Bull Fund widens to approximately 38% while the loss for a 3X Bear Fund rises to 62%.
At higher ranges of volatility, there is a chance of a near complete loss of Fund value even if the benchmark is flat. For instance, if annualized volatility of the benchmark is 90%, both the 3X Bull and the 3X Bear Funds targeted to the same benchmark would be expected to lose more than 90% of their value even if the cumulative benchmark return for the year was 0%. An indexs volatility rate is a statistical measure of the magnitude of fluctuations in the returns of an index.
Table 1
Volatility
Range |
3X Bull Fund Loss |
3X Bear Fund Loss |
||||||
10% |
3% | 6% | ||||||
20% |
11% | 21% | ||||||
30% |
24% | 42% | ||||||
40% |
38% | 62% | ||||||
50% |
53% | 78% | ||||||
60% |
67% | 89% | ||||||
70% |
78% | 95% | ||||||
80% |
87% | 98% | ||||||
90% |
92% | 99% | ||||||
100% |
96% | 99% |
Table 2 shows the annualized rate for each of the indexes to which one of the Funds is benchmarked over the five year period from May 30, 2008 through May 31, 2013. If an index has been in existence for less than 5 years, its inception date is noted next to its name in Table 2. The indexes to which the Funds are benchmarked have annualized historical volatility rates over that period ranging from 24.55% to 30.79%. Since market volatility has negative implications for Funds which rebalance daily, investors should be sure to monitor and manage their investments in the Funds particularly in volatile markets. The negative implications of volatility in Table 1 can be combined with the recent volatility ranges of various indexes in Table 2 to give investors some sense of the risks of holding the Funds for long periods. These tables are intended to simply underscore the fact that the Funds are designed as short-term trading vehicles for investors who intend to actively monitor and manage their portfolios. The Funds are not intended to be used by, and are not appropriate for, investors who do not intend to actively monitor and manage their portfolios.
Table 2
Index | Volatility | |||
MSCI Chile IMI 25/50 Index |
25.33% | |||
MSCI Hong Kong Index |
24.55% | |||
MSCI Japan Index |
24.86% | |||
MSCI Mexico IMI 25/50 Index |
30.79% |
A Precautionary Note to Investors Regarding Dramatic Index Movement. A 3X Bull Fund seeks daily exposure to its target index equal to 300% of its net assets while a 3X Bear Fund seeks daily exposure to its target index equal to 300% of its net assets. As a consequence, a Fund could theoretically lose an amount greater than its net assets in the event of a movement of its target index in excess of 33% in a direction adverse to the Fund (meaning a decline in the value of the target index of a 3X Bull Fund and a gain in the value of the target index for a 3X Bear Fund). Rafferty will attempt to position each Funds portfolio to ensure that a Fund does not lose more than 90% of its net asset value on a given day. The cost of such downside protection will be symmetrical limitations on gains. If Rafferty successfully positions a Funds portfolio to provide such limits, a Funds portfolio and net asset value will not be responsive to movements in its target index beyond 30% in a given day, whether that movement is favorable or adverse to the Fund. For example, if a 3X Bull Funds target index were to gain 35%, the 3X Bull Fund might be limited to a daily gain of 90%, which corresponds to 300% of an index gain of 30%, rather than 105%, which is 300% of the index gain of 35%. Rafferty cannot be assured of similarly limiting a Funds losses and shareholders should not expect such protection. In short, the risk of total loss exists. In the event of a severe index movement within one trading day, which results in such a limit on gains and losses, a Funds performance may be inconsistent with its stated investment objective.
The intra-day value of each Funds shares, otherwise known as the intraday indicative value or IIV, which is disseminated by the Exchange every 15 seconds throughout the business day, is based on the current market value of the securities and cash required to be deposited in exchange for a Creation Unit on the prior business day. The IIV does not necessarily reflect the precise composition of the current portfolio of securities held by a Fund at a particular point in time, nor the best possible valuation of the current portfolio. Therefore, the IIV should not be viewed as a real-time update of the Funds NAV, which is computed only once a day.
The Projected Return of a 3X Bull Fund for a Single Trading Day. Each 3X Bull Fund seeks to provide a daily return that is a multiple of the daily return of a target index or benchmark. Doing so requires the use of leveraged investment techniques, which necessarily incur financing charges. For instance, the Direxion Daily Chile Bull 3X Shares seeks exposure to its benchmark in an amount equal to 300% of its
70 | DIREXION SHARES ETF TRUST PROSPECTUS |
assets, meaning it uses leveraged investment techniques to seek exposure to the MSCI Chile IMI 25/50 Index in an amount equal to 300% of its net assets. In light of the financing charges and the 3X Bull Funds operating expenses, the expected return of the 3X Bull Funds over one trading day is equal to the gross expected return, which is the daily benchmark return multiplied by the 3X Bull Funds target, minus (i) financing charges incurred by the portfolio and (ii) daily operating expenses. For instance, if the MSCI Chile IMI 25/50 Index returns 2% on a given day, the gross expected return of the Direxion Daily Chile Bull 3X Shares would be 6%, but the net expected return, which factors in the cost of financing the portfolio and the impact of operating expenses, would be lower. Each Fund will reposition its portfolio at the end of every trading day. Therefore, if an investor purchases Fund shares at close of the markets on a given trading day, the investors exposure to the target index of a 3X Bull Fund would reflect 300% of the performance of the index during the following trading day, subject to the charges and expenses noted above, regardless of whether the investor sells the shares during that day.
The Projected Return of a 3X Bear Fund for a Single Trading Day. Each 3X Bear Fund seeks to provide a daily return which is a multiple of the inverse (or opposite) of the daily return of a target index or benchmark. To create the necessary exposure, a 3X Bear Fund engages in short selling borrowing and selling securities it does not own. The money that a 3X Bear Fund receives from short sales the short sale proceeds is an asset of the 3X Bear Fund that can generate income to help offset the 3X Bear Funds operating expenses. However, the costs of creating short exposure, which may require the Funds counterparties to borrow and sell certain securities, may offset or outweigh such income. As the holder of a short position, a 3X Bear Fund also is responsible for paying the dividends and interest accruing on the short position, which is an expense to the Fund that could cause the Fund to lose money on the short sale and may adversely affect its performance. Each Fund will reposition its portfolio at the end of every trading day. Therefore, if an investor purchases Fund shares at close of the markets on a given trading day, the investors exposure to the target index of a 3X Bear Fund would reflect 300% of the inverse performance of the index during the following trading day, subject to the charges and expenses noted above, regardless of whether the investor sells the shares during that day.
The Projected Returns of Funds for Intra-Day Purchases. Because the Funds rebalance their portfolios once daily, an investor who purchases shares during a day will likely have more, or less, than 300% leveraged investment exposure to the target index. The exposure to the target index received by an investor who purchases a Fund intra-day will differ from the Funds stated daily leveraged investment goal ( e.g., 300% or 300%) by an amount determined by the movement of the target index from its value at the end of the prior day. If the target index moves in a direction favorable to the Fund between the close of the market on one trading day through the time on the next trading day when the investor purchases Fund shares, the investor will receive less exposure to the target index than the stated fund daily goal ( e.g., 300% or 300%). Conversely, if the target index moves in a direction adverse to the Fund, the investor will receive more exposure to the target index than the stated fund daily goal ( e.g., 300% or 300%).
Table 3 below indicates the exposure to the target index that an intra-day purchase of a 3X Bull Fund would be expected to provide based upon the movement in the value of a 3X Bull Funds target index from the close of the market on the prior trading day. Such exposure holds until a subsequent sale on that same trading day or until the close of the market on that trading day. For instance, if the target index of a 3X Bull Fund has moved 2% in a direction favorable to a 3X Bull Fund, the investor would receive exposure to the performance of the target index from that point until the investor sells later that day or the end of the day equal to approximately 289% of the investors investment.
Conversely, if the target index has moved 2% in a direction unfavorable to a 3X Bull Fund, an investor at that point would receive exposure to the performance of the target index from that point until the investor sells later that day or the end of the day equal to approximately 313% of the investors investment.
The table includes ranges of index moves from 5% to 5% for the 3X Bull Fund. Index moves beyond the range noted below will result in exposure further from the Funds daily goal.
Table 3
Index Move |
Resulting Exposure for 3X Bull Fund |
|||
5% |
3.35 | |||
4% |
3.27 | |||
3% |
3.20 | |||
2% |
3.13 | |||
1% |
3.06 | |||
0% |
3.00 | |||
1% |
2.94 | |||
2% |
2.89 | |||
3% |
2.83 | |||
4% |
2.79 | |||
5% |
2.74 |
Table 4 below indicates the exposure to the target index that an intra-day purchase of a 3X Bear Fund would be expected to provide based upon the movement in the value of the 3X Bear Funds target index from the close of the market on the
DIREXION SHARES ETF TRUST PROSPECTUS | 71 |
prior trading day. Such exposure holds until a subsequent sale on that same trading day or until the close of the market on that trading day. Table 4 indicates that, if the target index of a 3X Bear Fund has moved 2% in a direction favorable to the 3X Bear Fund, the investor would receive exposure to the performance of the target index from that point until the investor sells later that day or the end of the day equal to approximately 277% of the investors investment. Conversely, if the target index has moved 2% in a direction unfavorable to the 3X Bear Fund, an investor would receive exposure to the performance of the target index from that point until the investor sells later that day or the end of the day equal to approximately 326% of the investors investment.
The table includes a range of index moves from 5% to 5% for the 3X Bear Fund. Index moves beyond the range noted below will result in exposure further from the Funds daily goal.
Table 4
Index Move |
Resulting Exposure
for 3X Bear Fund |
|||
5% |
2.48 | |||
4% |
2.57 | |||
3% |
2.67 | |||
2% |
2.77 | |||
1% |
2.88 | |||
0% |
3.00 | |||
1% |
3.12 | |||
2% |
3.26 | |||
3% |
3.40 | |||
4% |
3.55 | |||
5% |
3.71 |
The Projected Returns of Funds for Periods Other Than a Single Trading Day. The Funds seek leveraged investment results on a daily basis from the close of regular trading on one trading day to the close on the next trading day which should not be equated with seeking a leveraged goal for any other period. For instance, if the MSCI Chile IMI 25/50 Index gains 10% for a week, the Direxion Daily Chile Bull 3X Shares should not be expected to provide a return of 30% for the week even if it meets its daily target throughout the week. This is true because of the financing charges noted above but also because the pursuit of daily goals may result in daily leveraged compounding, which means that the return of an index over a period of time greater than one day multiplied by a Funds daily target or inverse daily target ( e.g., 300% or 300%) will not generally equal a Funds performance over that same period. In addition, the effects of compounding become greater the longer Shares are held beyond a single trading day.
The following charts set out a range of hypothetical daily performances during a given 10 trading days of an index and demonstrate how changes in the index impact the Funds performance for trading day and cumulatively up to, and including, the entire 10 trading day period. The charts are based on a hypothetical $100 investment in the Funds over a 10 trading day period and do not reflect expenses of any kind.
Table 5 The Market Lacks a Clear Trend
Index | 3X Bull Fund | 3X Bear Fund | ||||||||||||||||||||||||||||||||||
Value |
Daily Performance |
Cumulative
Performance |
NAV |
Daily Performance |
Cumulative
Performance |
NAV |
Daily Performance |
Cumulative
Performance |
||||||||||||||||||||||||||||
100 | $ | 100.00 | $ | 100.00 | ||||||||||||||||||||||||||||||||
Day 1 |
105 | 5.00% | 5.00% | $ | 115.00 | 15.00% | 15.00% | $ | 85.00 | 15.00% | 15.00% | |||||||||||||||||||||||||
Day 2 |
110 | 4.76% | 10.00% | $ | 131.43 | 14.29% | 31.43% | $ | 72.86 | 14.29% | 27.14% | |||||||||||||||||||||||||
Day 3 |
100 | 9.09% | 0.00% | $ | 95.58 | 27.27% | 4.42% | $ | 92.73 | 27.27% | 7.27% | |||||||||||||||||||||||||
Day 4 |
90 | 10.00% | 10.00% | $ | 66.91 | 30.00% | 33.09% | $ | 120.55 | 30.00% | 20.55% | |||||||||||||||||||||||||
Day 5 |
85 | 5.56% | 15.00% | $ | 55.76 | 16.67% | 44.24% | $ | 140.64 | 16.67% | 40.64% | |||||||||||||||||||||||||
Day 6 |
100 | 17.65% | 0.00% | $ | 85.28 | 52.94% | 14.72% | $ | 66.18 | 52.94% | 33.82% | |||||||||||||||||||||||||
Day 7 |
95 | 5.00% | 5.00% | $ | 72.48 | 15.00% | 27.52% | $ | 76.11 | 15.00% | 23.89% | |||||||||||||||||||||||||
Day 8 |
100 | 5.26% | 0.00% | $ | 83.93 | 15.79% | 16.07% | $ | 64.09 | 15.79% | 35.91% | |||||||||||||||||||||||||
Day 9 |
105 | 5.00% | 5.00% | $ | 96.52 | 15.00% | 3.48% | $ | 54.48 | 15.00% | 45.52% | |||||||||||||||||||||||||
Day 10 |
100 | 4.76% | 0.00% | $ | 82.73 | 14.29% | 17.27% | $ | 62.26 | 14.29% | 37.74% |
The cumulative performance of the index in Table 5 is 0% for 10 trading days. The hypothetical return of the 3X Bull Fund for the 10 trading day period is 17.27%, while the hypothetical return of the 3X Bear Fund is 37.74%. The volatility of the benchmark performance and lack of clear trend results in performance for each Fund for the period which bears little relationship to the performance of the index for the 10 trading day period.
72 | DIREXION SHARES ETF TRUST PROSPECTUS |
Table 6 The Market Rises in a Clear Trend
Index | 3X Bull Fund | 3X Bear Fund | ||||||||||||||||||||||||||||||||||
Value |
Daily Performance |
Cumulative
Performance |
NAV |
Daily Performance |
Cumulative
Performance |
NAV |
Daily Performance |
Cumulative
Performance |
||||||||||||||||||||||||||||
100 | $ | 100.00 | $ | 100.00 | ||||||||||||||||||||||||||||||||
Day 1 |
102 | 2.00% | 2.00% | $ | 106.00 | 6.00% | 6.00% | $ | 94.00 | 6.00% | 6.00% | |||||||||||||||||||||||||
Day 2 |
104 | 1.96% | 4.00% | $ | 112.24 | 5.88% | 12.24% | $ | 88.47 | 5.88% | 11.53% | |||||||||||||||||||||||||
Day 3 |
106 | 1.92% | 6.00% | $ | 118.71 | 5.77% | 18.71% | $ | 83.37 | 5.77% | 16.63% | |||||||||||||||||||||||||
Day 4 |
108 | 1.89% | 8.00% | $ | 125.43 | 5.66% | 25.43% | $ | 78.65 | 5.66% | 21.35% | |||||||||||||||||||||||||
Day 5 |
110 | 1.85% | 10.00% | $ | 132.40 | 5.56% | 32.40% | $ | 74.28 | 5.56% | 25.72% | |||||||||||||||||||||||||
Day 6 |
112 | 1.82% | 12.00% | $ | 139.62 | 5.45% | 39.62% | $ | 70.23 | 5.45% | 29.77% | |||||||||||||||||||||||||
Day 7 |
114 | 1.79% | 14.00% | $ | 147.10 | 5.36% | 47.10% | $ | 66.46 | 5.36% | 33.54% | |||||||||||||||||||||||||
Day 8 |
116 | 1.75% | 16.00% | $ | 154.84 | 5.26% | 54.84% | $ | 62.97 | 5.26% | 37.03% | |||||||||||||||||||||||||
Day 9 |
118 | 1.72% | 18.00% | $ | 162.85 | 5.17% | 62.85% | $ | 59.71 | 5.17% | 40.29% | |||||||||||||||||||||||||
Day 10 |
120 | 1.69% | 20.00% | $ | 171.13 | 5.08% | 71.13% | $ | 56.67 | 5.08% | 43.33% |
The cumulative performance of the index in Table 6 is 20% for 10 trading days. The hypothetical return of the 3X Bull Fund for the 10 trading day period is 71.13%, while the hypothetical return of the 3X Bear Fund is 43.33%. In this case, because of the positive index trend, the 3X Bull Fund gain is greater than 300% of the index gain and the 3X Bear Fund decline is less than 300% of the index gain for the 10 trading day period.
Table 7 The Market Declines in a Clear Trend
Index | 3X Bull Fund | 3X Bear Fund | ||||||||||||||||||||||||||||||||||
Value |
Daily
Performance |
Cumulative
Performance |
NAV |
Daily
Performance |
Cumulative
Performance |
NAV |
Daily Performance |
Cumulative
Performance |
||||||||||||||||||||||||||||
100 | $ | 100.00 | $ | 100.00 | ||||||||||||||||||||||||||||||||
Day 1 |
98 | 2.00% | 2.00% | $ | 94.00 | 6.00% | 6.00% | $ | 106.00 | 6.00% | 6.00% | |||||||||||||||||||||||||
Day 2 |
96 | 2.04% | 4.00% | $ | 88.24 | 6.12% | 11.76% | $ | 112.49 | 6.12% | 12.49% | |||||||||||||||||||||||||
Day 3 |
94 | 2.08% | 6.00% | $ | 82.73 | 6.25% | 11.76% | $ | 119.52 | 6.25% | 19.52% | |||||||||||||||||||||||||
Day 4 |
92 | 2.13% | 8.00% | $ | 77.45 | 6.38% | 22.55% | $ | 127.15 | 6.38% | 27.15% | |||||||||||||||||||||||||
Day 5 |
90 | 2.17% | 10.00% | $ | 72.40 | 6.52% | 27.60% | $ | 135.44 | 6.52% | 35.44% | |||||||||||||||||||||||||
Day 6 |
88 | 2.22% | 12.00% | $ | 67.57 | 6.67% | 32.43% | $ | 144.47 | 6.67% | 44.47% | |||||||||||||||||||||||||
Day 7 |
86 | 2.27% | 14.00% | $ | 62.96 | 6.82% | 37.04% | $ | 154.32 | 6.82% | 54.32% | |||||||||||||||||||||||||
Day 8 |
84 | 2.33% | 16.00% | $ | 58.57 | 6.98% | 41.43% | $ | 165.09 | 6.98% | 65.09% | |||||||||||||||||||||||||
Day 9 |
82 | 2.38% | 18.00% | $ | 54.39 | 7.14% | 45.61% | $ | 176.88 | 7.14% | 76.88% | |||||||||||||||||||||||||
Day 10 |
80 | 2.44% | 20.00% | $ | 50.41 | 7.32% | 49.59% | $ | 189.82 | 7.32% | 89.82% |
The cumulative performance of the index in Table 7 is 20% for 10 trading days. The hypothetical return of the 3X Bull Fund for the 10 trading day period is 49.59%, while the hypothetical return of the 3X Bear Fund 89.82%. In this case, because of the negative index trend, the 3X Bull Fund decline is less than 300% of the index decline and the 3X Bear Fund gain is greater than 300% of the index decline for the 10 trading day period.
DIREXION SHARES ETF TRUST PROSPECTUS | 73 |
An investment in any of the Funds entails risks. The Funds could lose money, or their performance could trail that of other investment alternatives. Rafferty cannot guarantee that any of the Funds will achieve their investment objectives. In addition, the Funds present some risks not traditionally associated with most mutual funds and ETFs. It is important that investors closely review and understand these risks before making an investment in any of the Funds. Turbulence in financial markets and reduced liquidity in equity, credit and fixed income markets could negatively affect issuers worldwide, including the Funds. The table below provides the risks of investing in the Funds. Following the table, each risk is explained.
Adverse
Market Conditions Risk |
Advisers
Investment Strategy Risk |
Cash
Transaction Risk |
Chilean
Securities Risk |
Concentration
Risk |
Consumer
Staples Sector Risk |
Counterparty
Risk |
Currency
Exchange Rate Risk |
Daily
Correlation Risk |
Depositary
Receipt Risk |
Derivatives
Risk |
Early
Close/ Trading Halt Risk |
Effects of
Compounding and Market Volatility Risk |
||||||||||||||
Direxion Daily Chile Bear 3X Shares |
X | X | X | X | X | X | X | X | X | X | ||||||||||||||||
Direxion Daily Chile Bull 3X Shares |
X | X | X | X | X | X | X | X | X | X | ||||||||||||||||
Direxion Daily Hong Kong Bear 3X Shares |
X | X | X | X | X | X | X | X | X | X | ||||||||||||||||
Direxion Daily Hong Kong Bull 3X Shares |
X | X | X | X | X | X | X | X | X | X | ||||||||||||||||
Direxion Daily Japan Bear 3X Shares |
X | X | X | X | X | X | X | X | X | |||||||||||||||||
Direxion Daily Japan Bull 3X Shares |
X | X | X | X | X | X | X | X | X | |||||||||||||||||
Direxion Daily Mexico Bear 3X Shares |
X | X | X | X | X | X | X | X | X | X | X | |||||||||||||||
Direxion Daily Mexico Bull 3X Shares |
X | X | X | X | X | X | X | X | X | X | X |
Emerging
Markets Risk |
Equity
Securities Risk |
Financial
Services Companies Risk |
Foreign
Securities Risk |
Gain
Limitation Risk |
Geographic
Concentration Risk |
High
Portfolio Turnover Risk |
Hong
Kong Securities Risk |
Intra-Day
Investment Risk |
Inverse
Correlation Risk |
Japanese
Securities Risk |
Leverage
Risk |
Liquidity
Risk |
Market
Risk |
|||||||||||||||
Direxion Daily Chile Bear 3X Shares |
X | X | X | X | X | X | X | X | X | X | ||||||||||||||||||
Direxion Daily Chile Bull 3X Shares |
X | X | X | X | X | X | X | X | X | X | ||||||||||||||||||
Direxion Daily Hong Kong Bear 3X Shares |
X | X | X | X | X | X | X | X | X | X | X | X | ||||||||||||||||
Direxion Daily Hong Kong Bull 3X Shares |
X | X | X | X | X | X | X | X | X | X | X | X | ||||||||||||||||
Direxion Daily Japan Bear 3X Shares |
X | X | X | X | X | X | X | X | X | X | ||||||||||||||||||
Direxion Daily Japan Bull 3X Shares |
X | X | X | X | X | X | X | X | X | X | ||||||||||||||||||
Direxion Daily Mexico Bear 3X Shares |
X | X | X | X | X | X | X | X | X | X | ||||||||||||||||||
Direxion Daily Mexico Bull 3X Shares |
X | X | X | X | X | X | X | X | X | X |
Market
Timing Risk |
Mid
Capitalization Company Risk |
Mexican
Securities Risk |
Negative
Implications of Daily Goals in Volatile Markets |
Non-Diversification
Risk |
Regulatory
Risk |
Risks of
Investing in Other Investment Companies
(including
|
Shorting
Risk |
Small and
Mid Capitalization Company Risk |
Tax and
Distribution Risk |
Tracking
Error Risk |
Valuation
Time Risk |
Special
Risks of Exchange- Traded Funds |
||||||||||||||
Direxion Daily Chile Bear 3X Shares |
X | X | X | X | X | X | X | X | X | X | X | |||||||||||||||
Direxion Daily Chile Bull 3X Shares |
X | X | X | X | X | X | X | X | X | X | ||||||||||||||||
Direxion Daily Hong Kong Bear 3X Shares |
X | X | X | X | X | X | X | X | X | X | X | |||||||||||||||
Direxion Daily Hong Kong Bull 3X Shares |
X | X | X | X | X | X | X | X | X | X | ||||||||||||||||
Direxion Daily Japan Bear 3X Shares |
X | X | X | X | X | X | X | X | X | X | X | |||||||||||||||
Direxion Daily Japan Bull 3X Shares |
X | X | X | X | X | X | X | X | X | X | ||||||||||||||||
Direxion Daily Mexico Bear 3X Shares |
X | X | X | X | X | X | X | X | X | X | X | X | ||||||||||||||
Direxion Daily Mexico Bull 3X Shares |
X | X | X | X | X | X | X | X | X | X | X |
74 | DIREXION SHARES ETF TRUST PROSPECTUS |
Adverse Market Conditions Risk
The performance of each Fund is designed to correlate to the performance of an index or benchmark. As a consequence, a Funds performance will suffer during conditions which are adverse to its investment goals. For example, if the target index has risen on a given day, a 3X Bear Funds performance should fall. Conversely, if the target index has fallen on a given day, a 3X Bull Funds performance also should fall.
Advisers Investment Strategy Risk
The Adviser utilizes a quantitative methodology to select investments for each Fund. Although this methodology is designed to correlate each Funds performance with the performance of its respective Index, there is no assurance that such methodology will be successful and will enable the Funds to achieve their investment objectives.
Cash Transaction Risk
Unlike most ETFs, the 3X Bear Funds currently intend to effect creation and redemptions principally for cash, rather than principally for in-kind securities, because of the nature of the financial instruments held by each 3X Bear Fund. As such, investments in 3X Bear Funds may be less tax efficient than investments in conventional ETFs. ETFs generally are able to make in-kind redemptions and avoid being taxed on gain on the distributed portfolio securities at the fund level. Because the 3X Bear Funds currently intend to effect redemptions principally for cash, a 3X Bear Fund may be required to sell portfolio securities in order to obtain the cash needed to distribute redemption proceeds. A 3X Bear Fund may recognize a capital gain on these sales that might not have been incurred if such 3X Bear Fund had made a redemption in-kind and this may decrease the tax efficiency of the 3X Bear Funds compared to ETFs that utilize an in-kind redemption process.
Chilean Securities Risk
Investment in securities of Chilean issuers involves risks that may be greater than if a Funds investments were more geographically diverse. Chiles economy is heavily dependent on trading with key partners. Any increases or decreases in the volume of this trading, changes in taxes or tariffs, or variance in political relationships between nations may impact the Chilean economy overall in a way that would be adverse to a Funds investments. Additionally, investment in Chile may be subject to any positive or adverse effects of the varying nature of its economic landscape with respect to expropriation and/or nationalization of assets, strengthened or lessened restrictions on and government intervention in international trade, confiscatory taxation, political instability, including authoritarian and/or military involvement in governmental decision making, armed conflict, the impact on the economy as a result of civil war and social instability as a result of religious, ethnic and/or socioeconomic unrest.
Concentration Risk
Concentration risk results from a Fund focusing its investments in a specific industry or group of industries to approximately the same extent that the Funds underlying index is so concentrated. The performance of a Fund that focuses its investments in a particular industry or sector may be more volatile than a fund that does not concentrate its investments. A Fund that concentrates its investments in an industry or group of industries also may be more susceptible to any single economic market, political or regulatory occurrence affecting that industry or group of industries. However, a Fund only may concentrate its investments ( i.e. , hold 25% or more of its total assets in the stocks of a particular industry or group of industries) to approximately the same extent that its underlying index concentrates in the stocks of a particular industry or group of industries. For purposes of this limitation, securities of the U.S. Government (including its agencies and instrumentalities), repurchase agreements collateralized by U.S. Government securities, and securities of state or municipal governments and their political subdivisions are not considered to be issued by members of any industry.
Consumer Staples Sector Risk
A Fund may focus its investments in securities issued by, and/or have exposure to, companies in the consumer staples sector. The consumer staples sector may be affected by the permissibility of using various food additives and production methods, changing consumer tastes, marketing campaigns and other factors affecting consumer demand. In particular, tobacco companies may be adversely affected by new laws, regulations and litigation. The consumer staples sector may also be adversely affected by changes or trends in commodity prices, which may be influenced or characterized by unpredictable factors.
Counterparty Risk
The Funds may invest in financial instruments involving counterparties for the purpose of attempting to gain exposure to a particular group of securities or an asset class without actually purchasing those securities or investments, or to hedge a position. Such financial instruments include, but are not limited to, total return, index and interest rate swap agreements. The Funds will use short-term counterparty agreements to exchange the returns (or differentials in rates of return) earned or realized in particular predetermined investments or instruments. The Funds will not enter into any agreement involving a counterparty unless the Adviser believes that the other party
DIREXION SHARES ETF TRUST PROSPECTUS | 75 |
to the transaction is creditworthy. The use of swap agreements involves risks that are different from those associated with ordinary portfolio securities transactions. For example, the Funds bear the risk of loss of the amount expected to be received under a swap agreement in the event of the default or bankruptcy of a swap agreement counterparty. In addition, the Funds may enter into swap agreements with a limited number of counterparties, which may increase the Funds exposure to counterparty credit risk. Swap agreements and other counterparty instruments also may be considered to be illiquid. Further, there is a risk that no suitable counterparties will be willing to enter into, or continue to enter into, transactions with the Funds and, as a result, the Funds may not be able to achieve their investment objectives.
Currency Exchange Rate Risk
In seeking exposure to foreign companies, changes in foreign currency exchange rates will affect the value of what a Fund owns and the Funds share price. Generally, when the U.S. dollar rises in value against a foreign currency, an investment in that country loses value because that currency is worth fewer U.S. dollars. Devaluation of a currency by a countrys government or banking authority also will have a significant impact on the value of any investments denominated in that currency. Currency markets generally are not as regulated as securities markets.
Daily Correlation Risk
There is no guarantee that the Fund will achieve a high degree of correlation to the Index and therefore achieve its daily investment objective. To achieve a high degree of correlation with the Index, the Fund seeks to rebalance its portfolio daily to keep leverage consistent with its daily target. The Fund may have difficulty achieving its daily target due to fees and expenses, high portfolio turnover, transaction costs and costs associated with the use of leveraged investment techniques and/or a temporary lack of liquidity in the markets for the securities held by the Fund. Market disruptions, regulatory restrictions or extreme volatility will also adversely affect the Funds ability to adjust exposure to the required levels. The Fund may not have investment exposure to all securities in its underlying Index, or its weighting of investment exposure to such stocks or industries may be different from that of the Index. In addition, the Fund may invest in securities or financial instruments not included in the underlying Index. The Fund may be subject to large movements of assets into and out of the Fund, potentially resulting in the Fund being over- or under-exposed to its Index. In addition, the target amount of portfolio exposure to the Index is impacted dynamically by the Indexs movement. Because of this, it is unlikely that the Fund will be perfectly exposed to the Index at the end of each day. The possibility of the Fund being materially over- or under-exposed to its Index increases on days when the Index is volatile near the close of the trading day. Activities surrounding annual index reconstitutions and other index rebalancing or reconstitution events may hinder the Funds ability to meet its daily investment objective on that day.
Depositary Receipt Risk
In seeking exposure to foreign companies, a Funds investments may be in the form of depositary receipts or other securities convertible into securities of foreign issuers. American Depositary Receipts (ADRs) are receipts typically issued by an American bank or trust company that evidence ownership of underlying securities issued by a foreign corporation. European Depositary Receipts (EDRs) are receipts issued in Europe that evidence a similar ownership arrangement. Global Depositary Receipts (GDRs) are receipts issued throughout the world that evidence a similar arrangement. Generally, ADRs, in registered form, are designed for use in the U.S. securities markets, and EDRs, in bearer form, are designed for use in European securities markets. GDRs are tradable both in the United States and in Europe and are designed for use throughout the world. Depositary receipts will not necessarily be denominated in the same currency as their underlying securities.
Depositary receipts may be purchased through sponsored or unsponsored facilities. A sponsored facility is established jointly by the issuer of the underlying security and a depositary, whereas a depositary may establish an unsponsored facility without participation by the issuer of the depositary security. Holders of unsponsored depositary receipts generally bear all the costs of such facilities and the depositary of an unsponsored facility frequently is under no obligation to distribute shareholder communications received from the issuer of the deposited security or to pass through voting rights to the holders of such receipts of the deposited securities.
Fund investments in depositary receipts, which include ADRs, GDRs and EDRs, are deemed to be investments in foreign securities for purposes of a Funds investment strategy.
Derivatives Risk
The Funds use investment techniques, including investments in derivatives such as futures contracts, forward contracts, options and swaps, and other instruments that attempt to track the price movement of underlying securities or indices, which may be considered aggressive. The derivative instruments that the Funds may invest in are described in Additional Information Regarding Investment Techniques and Policies. Investments in derivatives in general are subject to market risks that may cause their prices to
76 | DIREXION SHARES ETF TRUST PROSPECTUS |
fluctuate over time. In addition, such instruments may experience potentially dramatic price changes (losses) and imperfect correlations between the price of the contract and the underlying security or index which will increase the volatility of the Funds and may involve a small investment of cash relative to the magnitude of the risk assumed. The use of derivatives may expose the Funds to additional risks that they would not be subject to if they invested directly in the securities underlying those derivatives, such as counterparty risk and the risk that the derivatives may become illiquid. The use of derivatives may result in larger losses or smaller gains than otherwise would be the case. Additionally, with respect to the use of swap agreements, if the Index has a dramatic intraday move in value that causes a material decline in the Funds NAV, the terms of the swap agreement between the Fund and its counterparty may allow the counterparty to immediately close out of the transaction with the Fund. In such circumstances, the Fund may be unable to enter into another swap agreement or invest in other derivatives to achieve the desire exposure consistent with the Funds daily investment objective. This may prevent the Fund from achieving its daily investment objective particularly if the Index reverses all or a portion of its intraday move by the end of the day. The derivatives that the Funds may invest in include:
|
Futures. A futures contact is a contract to purchase or sell a particular security, or the cash value of an index, at a specified future date at a price agreed upon when the contract is made. Under such contracts, no delivery of the actual securities is required. Rather, upon the expiration of the contract, settlement is made by exchanging cash in an amount equal to the difference between the contract price and the closing price of a security or index at expiration, net of the variation margin that was previously paid. |
|
Forward Contracts. Forward contracts are two-party contracts pursuant to which one party agrees to pay the counterparty a fixed price for an agreed upon amount of commodities, securities, or the cash value of the commodities, securities or the securities index, at an agreed upon date. A forward currency contract is an obligation to buy or sell a specific currency at a future date, which may be any fixed number of days from the date of the contract agreed upon by the parties, at a price set at the time of the contract. |
|
Options. An option is a contract that gives the purchaser (holder) of the option, in return for a premium, the right to buy from (call) or sell to (put) the seller (writer) of the option the security or currency underlying the option at a specified exercise price at any time during the term of the option (normally not exceeding nine months). The writer of an option has the obligation upon exercise of the option to deliver the underlying security or currency upon payment of the exercise price or to pay the exercise price upon delivery of the underlying security or currency. |
|
Options on Futures Contracts. An option on a futures contract provides the holder with the right to enter into a long position in the underlying futures contract, in the case of a call option, or a short position in the underlying futures contract in the case of a put option, at a fixed exercise price to a stated expiration date. Upon exercise of the option by the holder, the contract market clearing house establishes a corresponding short position for the writer of the option, in the case of a call option, or a corresponding long position, in the case of a put option. |
|
Swap Agreements. In an interest rate swap, a Fund and another party exchange the right to receive interest payments on a security or other reference rate. The terms of the instrument are generally negotiated by a Fund and its swap counterparty. In a total return swap, one party agrees to pay the other party an amount equal to the total return on a defined underlying asset or a non-asset reference during a specified period of time. The underlying asset might be a security or basket of securities or a non-asset reference such as a securities index. In return, the other party would make periodic payments based on a fixed or variable interest rate or on a total return from a different underlying asset or non-asset reference. |
Early Close/Trading Halt Risk
An exchange or market may close or issue trading halts on specific securities, or the ability to buy or sell certain securities or financial instruments may be restricted, which may result in a Fund being unable to buy or sell certain securities or financial instruments. In such circumstances, a Fund may be unable to rebalance its portfolio, may be unable to accurately price its investments and/or may incur substantial trading losses.
Effects of Compounding and Market Volatility Risk
There can be no guarantee that a Fund will achieve a high degree of correlation with its investment objective relative to its benchmark index. A failure to achieve a high degree of correlation may prevent a Fund from achieving its investment objective. A number of factors may adversely affect a Funds correlation with its benchmark, including fees, expenses, transaction costs, costs associated with the Funds use of leveraged investment techniques, income items and accounting standards. A Fund may not have investment exposure to all securities in its underlying benchmark index, or its weighting of investment exposure to such stocks or industries may be different from that of the index. In addition, a Fund may invest in securities or financial
DIREXION SHARES ETF TRUST PROSPECTUS | 77 |
instruments not included in the index underlying its benchmark. A Fund may be subject to large movements of assets into and out of the Fund, potentially resulting in the Fund being over- or under-exposed to its benchmark. Activities surrounding periodic index reconstitutions and other index rebalancing or reconstitution events may hinder the Funds ability to meet their daily investment objective on that day. Each Fund seeks to rebalance its portfolio daily to keep leverage consistent with each Funds daily investment objective.
Each Fund does not attempt to, and should not be expected to, provide returns which are a multiple of the return of the Index for periods other than a single day. Each Fund rebalances its portfolio on a daily basis, increasing exposure in response to that days gains or reducing exposure in response to that days losses. This means that for a period longer than one day, the pursuit of daily goals may result in daily leveraged compounding for the Funds. It also means that the return of an index over a period of time greater than one day multiplied by the Funds daily target ( e.g., 300% or 300%) generally will not equal the Funds performance over that same period.
As a result, over time, the cumulative percentage increase or decrease in the value of the Funds portfolio may diverge significantly from the cumulative percentage increase or decrease in the multiple of the return of the Funds underlying index due to the compounding effect of losses and gains on the returns of the Fund. It also is expected that the Funds use of leverage will cause the Fund to underperform the return of three times its benchmark in a trendless or flat market.
The effect of compounding becomes more pronounced on the Funds performance as the Index experiences volatility. The Indexs volatility rate is a statistical measure of the magnitude of fluctuations in the returns of the Index. The tables below provide examples of how Index volatility could affect the Funds performance. The charts show estimated Fund returns for a number of combinations of performance and volatility over a five-year period.
As shown in Table 8 and 9 below, a 3X Bull Fund would be expected to lose 17.1% and a 3X Bear Fund would be expected to lose 31.3% if their Index provided no return over a one year period during which the Index experienced annualized volatility of 25%. If the Indexs annualized volatility were to rise to 75%, the hypothetical loss for a one year period widens to approximately 81.5% for the 3X Bull Fund and 96.6% for the 3X Bear Fund.
At higher ranges of volatility, there is a chance of a near complete loss of value even if the Index is flat. For instance, if the Indexs annualized volatility is 100%, it is likely that the 3X Bull Fund would lose 95% of its value, and the 3X Bear Fund would lose approximately 100% of its value, even if the cumulative Index return for the year was only 0%.
Table 8 3X Bull Fund
One
Year Index Return |
300%
Year
Return |
Volatility Rate | ||||||||||||||||||||||||
10% | 25% | 50% | 75% | 100% | ||||||||||||||||||||||
60% | 180% | 93.8% | 94.7% | 97.0% | 98.8% | 99.7% | ||||||||||||||||||||
50% | 150% | 87.9% | 89.6% | 94.1% | 97.7% | 99.4% | ||||||||||||||||||||
40% | 120% | 79.0% | 82.1% | 89.8% | 96.0% | 98.9% | ||||||||||||||||||||
30% | 90% | 66.7% | 71.6% | 83.8% | 93.7% | 98.3% | ||||||||||||||||||||
20% | 60% | 50.3% | 57.6% | 75.8% | 90.5% | 97.5% | ||||||||||||||||||||
10% | 30% | 29.3% | 39.6% | 65.6% | 86.5% | 96.4% | ||||||||||||||||||||
0% | 0% | 3.0% | 17.1% | 52.8% | 81.5% | 95.0% | ||||||||||||||||||||
10% | 30% | 29.2% | 10.3% | 37.1% | 75.4% | 93.4% | ||||||||||||||||||||
20% | 60% | 67.7% | 43.3% | 18.4% | 68.0% | 91.4% | ||||||||||||||||||||
30% | 90% | 113.2% | 82.1% | 3.8% | 59.4% | 89.1% | ||||||||||||||||||||
40% | 120% | 166.3% | 127.5% | 29.6% | 49.2% | 86.3% | ||||||||||||||||||||
50% | 150% | 227.5% | 179.8% | 59.4% | 37.6% | 83.2% | ||||||||||||||||||||
60% | 180% | 297.5% | 239.6% | 93.5% | 24.2% | 79.6% |
Table 9 3X Bear Fund
One
Return |
300%
Year
Return |
Volatility Rate | ||||||||||||||||||||||||
10% | 25% | 50% | 75% | 100% | ||||||||||||||||||||||
60% | 180% | 1371.5% | 973.9% | 248.6% | 46.5% | 96.1% | ||||||||||||||||||||
50% | 150% | 653.4% | 449.8% | 78.5% | 72.6% | 98.0% | ||||||||||||||||||||
40% | 120% | 336.0% | 218.2% | 3.3% | 84.2% | 98.9% | ||||||||||||||||||||
30% | 90% | 174.6% | 100.4% | 34.9% | 90.0% | 99.3% | ||||||||||||||||||||
20% | 60% | 83.9% | 34.2% | 56.4% | 93.3% | 99.5% | ||||||||||||||||||||
10% | 30% | 29.2% | 5.7% | 69.4% | 95.3% | 99.7% | ||||||||||||||||||||
0% | 0% | 5.8% | 31.3% | 77.7% | 96.6% | 99.8% | ||||||||||||||||||||
10% | 30% | 29.2% | 48.4% | 83.2% | 97.4% | 99.8% | ||||||||||||||||||||
20% | 60% | 45.5% | 60.2% | 87.1% | 98.0% | 99.9% | ||||||||||||||||||||
30% | 90% | 57.1% | 68.7% | 89.8% | 98.4% | 99.9% | ||||||||||||||||||||
40% | 120% | 65.7% | 75.0% | 91.9% | 98.8% | 99.9% | ||||||||||||||||||||
50% | 150% | 72.1% | 79.6% | 93.4% | 99.0% | 99.9% | ||||||||||||||||||||
60% | 180% | 77.0% | 83.2% | 94.6% | 99.2% | 99.9% |
Holding an unmanaged position opens the investor to the risk of market volatility adversely affecting the performance of the investment. The Funds are not appropriate for investors who do not intend to actively monitor and manage their portfolios. These tables are intended to underscore the fact that the Funds are designed as short-term trading vehicles for investors who intend to actively monitor and manage their portfolios.
Emerging Markets Risk
Indirectly investing in emerging markets instruments involve greater risks than indirectly investing in foreign instruments in general. Risks of investing in emerging market countries
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include political or social upheaval, nationalization of businesses, restrictions on foreign ownership and prohibitions on the repatriation of assets. There may also be risks from an economys dependence on revenues from particular commodities or industries. In addition, currency transfer restrictions, limited potential buyers for such instruments, delays and disruption in settlement procedures and illiquidity or low volumes of transactions may make exits difficult or impossible at times.
Equity Securities Risk
Investments in publicly issued equity securities and securities that provide exposure to equity securities, including common stocks, in general are subject to market risks that may cause their prices to fluctuate over time. Fluctuations in the value of equity securities in which a Fund invests will cause the NAV of the Fund to fluctuate.
Financial Services Companies Risk
Certain Funds may focus their investments in securities issued by, and/or have exposure to, financial services companies. As a result, a Fund may be subject to risks of legislative or regulatory changes, adverse market conditions and/or increased competition affecting the financial services companies. Financial services companies are subject to extensive governmental regulation, which may limit both the amounts and types of loans and other financial commitments they can make, and the rates and fees that they can charge. Profitability is largely dependent on the availability and cost of capital, and can fluctuate significantly when interest rates change. Credit losses resulting from financial difficulties of borrowers also can negatively impact the sector.
Foreign Securities Risk
Indirectly investing in foreign instruments may involve greater risks than investing in domestic instruments. As a result, a Funds returns and net asset values may be affected to a large degree by fluctuations in currency exchange rates, interest rates, political, diplomatic or economic conditions and regulatory requirements in other countries. The laws and accounting, auditing, and financial reporting standards in foreign countries typically are not as strict as they are in the U.S., and there may be less public information available about foreign companies.
Gain Limitation Risk
Rafferty will attempt to position each Funds portfolio to ensure that a Fund does not lose more than 90% of its net asset value on a given day. The cost of such downside protection will be limitations on a Funds gains. As a consequence, a Funds portfolio may not be responsive to index movements beyond 30% in a given day in a direction favorable to the Fund. For example, if a 3X Bull Funds target index were to gain 35%, a 3X Bull Fund might be limited to a daily gain of 90% rather than 105%, which is 300% of the index gain of 35%.
Geographic Concentration Risk
Investments in a particular country or geographic region may be particularly susceptible to political, diplomatic or economic conditions and regulatory requirements. As a result, Funds that focus their investments in a particular country or geographic region may be more volatile than a more geographically diversified fund.
High Portfolio Turnover Risk
Daily rebalancing of Fund holdings pursuant to each Funds daily investment objective causes a much greater number of portfolio transactions when compared to most exchange-traded funds. Such frequent and active trading leads to significantly higher transaction costs for the Funds because of increased broker commissions resulting from such transactions. In addition, there is the possibility of significantly increased capital gains, including short-term and/or long-term capital gains that will be taxable to shareholders as ordinary income. Each Fund calculates portfolio turnover without including the short term cash instruments or derivative transactions that comprise the majority of that Funds trading. As such, if a Funds extensive use of derivative instruments were reflected, the calculated portfolio turnover rate would be significantly higher.
Hong Kong Securities Risk
Investment in securities of Hong Kong issuers involves risks that may be greater than if a Funds investments were more geographically diverse. Hong Kongs reversion to China has been marked by increased volatility and uncertainty in its economic and political status, which may result in adverse affects for a Funds investments. Hong Kongs economy has become more dependent on Chinas role in the global market and the strength or diminishment of that relationship may impact Hong Kong issuers. Additionally, because Hong Kong has few natural resources, any surplus or shortage in the commodity markets could impact the Hong Kong economy as a whole.
Intra-Day Investment Risk
The Funds seek daily leveraged investment results, which should not be equated with seeking an investment goal for shorter than a day. Thus, an investor who purchases Fund shares after the close of the markets on one trading day and before the close of the markets on the next trading day will likely have more, or less, than 300% or 300% leveraged investment exposure to the target index, depending upon the
DIREXION SHARES ETF TRUST PROSPECTUS | 79 |
movement of the target index from the end of one trading day until the time of purchase. If the target index moves in a direction favorable to the Fund, the investor will receive exposure to the target index less than 300% or 300% exposure to the target index. Conversely, if the target index moves in a direction adverse to the Fund, the investor will receive exposure to the target index greater than 300% or 300% exposure to the target index. Investors may consult the Funds website at any point during the day to determine how the current value of a Funds target index relates to the value of the target index at the end of the previous day. In addition, Graphs 1 through 4 and the accompanying text included in the risk titled Negative Implications of Daily Goals in Volatile Markets provide a detailed discussion of such risk.
Inverse Correlation Risk
Each 3X Bear Fund is negatively correlated to its index and should lose money when its index rises a result that is the opposite from conventional funds. Because each 3X Bear Fund seeks daily returns inverse by a defined percentage to its index, the difference between a 3X Bear Funds daily return and the performance of its index may be negatively compounded during periods in which the markets decline. By its nature, inverse correlation magnifies the impact of compounding and market volatility. For instance, if an index gains 5%, a 3X Bull Fund would be expected to gain 15% and a 3X Bear Fund would be expected to lose 15%. The 3X Bull Funds performance differs from the index by 10%, while the 3X Bear Funds performance differs by 20%. The 3X Bear Fund has moved a greater distance from its index, which illustrates the greater volatility experienced by 3X Bear Funds.
Japanese Securities Risk
Investment in securities of Japanese issuers involves risks that may be greater than if a Funds investments were more geographically diverse. The Japanese economy has recently emerged from a prolonged economic downturn. Since 2000, Japans economic growth rate has remained relatively low. Its economy is characterized by government intervention and protectionism, an unstable financial services sector and relatively high unemployment. Japans economy is heavily dependent on international trade and has been adversely affected by trade tariffs and competition from emerging economies. As such, economic growth is heavily dependent on continued growth in international trade, government support of the financial services sector, among other troubled sectors, and consistent government policy. Any changes or trends in these economic factors could have a significant impact on Japans economy overall and may negatively affect a Funds investment. Japans economy is also closely tied to its two largest trading partners, the U.S. and China. Economic volatility in either nation may create volatility for Japans economy as well. Additionally, as China has increased its role with Japan as a trading partner, political tensions between the countries has become strained. Any increase or decrease in such tension may have consequences for investment in Japanese issuers.
Leverage Risk
If you invest in the Funds, you are exposed to the risk that any adverse daily performance of a Funds target index will be leveraged. This means that, if a Funds target index experiences adverse daily performance, your investment in the Fund will be reduced by an amount equal to 3% for every 1% of adverse performance, not including the cost of financing the portfolio and the impact of operating expenses, which would further lower your investment.
A Fund could theoretically lose an amount greater than its net assets in the event of a movement of its target index in excess of 33% in a direction adverse to the Fund. Further, purchasing shares of a Fund during a day may result in greater than 300% or 300% exposure to the performance of the target index if the target index moves in a direction adverse to the Fund between the close of the markets on one trading day and before the close of the markets on the next trading day. Graphs 1 through 4 and the accompanying text included in the risk titled Negative Implications of Daily Goals in Volatile Markets provide a detailed discussion of such risks. In addition, the Funds website will provide information on a daily basis regarding the current relevant exposure if an investor purchases new shares of a Fund.
Liquidity Risk
Some securities held by the Funds, including derivatives, may be difficult to sell or illiquid, particularly during times of market turmoil. Illiquid securities also may be difficult to value. If the Fund is forced to sell an illiquid security at an unfavorable time or at a price that is lower than Raffertys judgment of the securitys true market value, the Fund may be forced to sell the security at a loss. Such a situation may prevent the Fund from limiting losses, realizing gains or achieving a high correlation with the Index.
Market Risk
Each Fund is subject to market risks that can affect the value of its shares. These risks include political, regulatory, market and economic developments, including developments that impact specific economic sectors, industries or segments of the market. A 3X Bull Fund typically would lose value on a day when its underlying index declines. A 3X Bear Fund typically would lose value on a day when its underlying index increases.
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Market Timing Risk
Rafferty expects a significant portion of the assets of each Fund to come from professional money managers and investors who use the Funds as part of asset allocation and market timing investment strategies. These strategies often call for frequent trading to take advantage of anticipated changes in market conditions. Frequent trading could increase the rate of the Funds portfolio turnover, which involves correspondingly greater expenses to a Fund, including brokerage commissions or dealer mark-ups/mark-downs and other transaction costs on the sale of securities and reinvestments in other securities. Such sales also may result in adverse tax consequences to a Funds shareholders. The trading costs and tax effects associated with portfolio turnover may adversely affect the Funds performance. In addition, large movements of assets into and out of the Funds may have a negative impact on their ability to achieve their investment objectives or their desired level of operating expenses. The risks associated with market timing activity and high portfolio turnover will have a negative impact on longer-term investments.
Mexican Securities Risk
Investment in securities of Mexican issuers involves risks that may be greater than if a Funds investments were more geographically diverse. Mexicos economy is heavily dependent on trading with key partners. Any increases or decreases in the volume of this trading, changes in taxes or tariffs, or variance in political relationships between those nations may impact the Mexican economy overall in a way that would be adverse to a Funds investments. Additionally, investment in Mexico may be subject to any positive or adverse effects of the varyingnature of its economic landscape with respect to expropriation and/or nationalization of assets, strengthened or lessened restrictions on and government intervention in international trade, confiscatory taxation, political instability, including authoritarian and/or military involvement in governmental decision making, armed conflict, the impact on the economy as a result of civil war and social instability as a result of religious, ethnic and/or socioeconomic unrest.
Mid Capitalization Company Risk
Certain Funds may invest in the securities of mid capitalization companies and securities which provide exposure to mid capitalization companies. Such investment involves greater risks and the possibility of greater price volatility than investing in more established, larger capitalization companies. Mid capitalization companies often have narrower markets for their goods and/or services and more limited managerial and financial resources than larger, more established companies. Furthermore, those companies often have limited product lines, services, markets, financial resources or are dependent on a small management group. In addition, because these stocks are not well-known to the investing public, do not have significant institutional ownership and are followed by relatively few security analysts, there will normally be less publicly available information concerning these securities compared to what is available for the securities of larger companies. Adverse publicity and investor perceptions, whether based on fundamental analysis, can decrease the value and liquidity of securities held by a Fund. As a result, their performance can be more volatile and they face greater risk of business failure, which could increase the volatility of a Funds portfolio.
Negative Implications of Daily Goals in Volatile Markets
Each Fund seeks to provide a return which is a multiple of the daily performance of its benchmark. No Fund attempts to, and no Fund should be expected to, provide returns which are a multiple of the return of the benchmark for periods longer than a single trading day. Each Fund repositions its portfolio at the end of each trading day, increasing exposure in response to that days gains or reducing exposure in response to that days losses. If adverse daily performance of a Funds target index reduces the amount of a shareholders investment, any further adverse daily performance will lead to a smaller dollar loss because the shareholders investment had already been reduced by the prior adverse performance. Equally, however, if favorable daily performance of a Funds target index increases the amount of a shareholders investment, the dollar amount lost due to future adverse performance will increase correspondingly.
Daily repositioning will impair a Funds performance if the benchmark experiences volatility. For instance, a hypothetical 3X Bull Fund and 3X Bear Fund would be expected to lose 9.96% and 12.16%, respectively (as shown in Graphs 1 and 2 below) if their benchmark was flat over a hypothetical one year period during which the benchmark experienced annualized volatility of 15%. If the benchmarks annualized volatility were to rise to 40%, the hypothetical loss for a one year period would widen to approximately 55.51% for the 3X Bull Fund and 77.75% for the 3X Bear Fund (as illustrated in Graphs 3 and 4). An indexs volatility rate is a statistical measure of the magnitude of fluctuations in the returns of an index. Since market volatility, like that experienced by the markets currently, has negative implications for Funds which rebalance daily, investors should be sure to monitor and manage their investments in the Funds in volatile markets.
The following graphs assume that the Funds perfectly achieve their investment objectives. To isolate the impact of leverage, these graphs assume a) no dividends paid by the companies included on the index; b) no fund expenses; and
DIREXION SHARES ETF TRUST PROSPECTUS | 81 |
c) borrowing/lending rates (to obtain required leverage) of zero percent. If Fund expenses were included, the Funds performance would be lower than that shown.
Graph 1 Hypothetical 3X Bull Fund Performance with Low Volatility
Graph 2 Hypothetical -3X Bear Fund Performance with Low Volatility
Graph 3 Hypothetical 3X Bull Fund Performance with High Volatility
Graph 4 Hypothetical -3X Bear Fund Performance with High Volatility
Non-Diversification Risk
Each Fund is non-diversified. A non-diversified fund invests a high percentage of its assets in a limited number of securities. A non-diversified funds NAV and total return may fluctuate more or fall greater in times of weaker markets than a diversified mutual fund.
Regulatory Risk
Each Fund is subject to the risk that a change in U.S. law and related regulations will impact the way the Funds operate, increase the particular costs of the Funds operations and/or change the competitive landscape. In particular, there is no guarantee that the Bear Funds will be permitted to continue to engage in short sales, which are designed to earn the Fund a profit from the decline of the price of a particular security, basket of securities or index.
Risks of Investing in Other Investment Companies (including ETFs)
Investments in the securities of other investment companies, including ETFs, (which may, in turn invest in equities, bonds, and other financial vehicles) may involve duplication of advisory fees and certain other expenses. By investing in another investment company or ETF, a Fund becomes a shareholder of that investment company or ETF. As a result, Fund shareholders indirectly bear the Funds proportionate share of the fees and expenses indirectly paid by shareholders of the other investment company or ETF, in addition to the fees and expenses Fund shareholders bear in connection with the Funds own operations. The Funds performance may be magnified positively or negatively by virtue of its investment in other investment companies. As a shareholder, the Fund must rely on the investment company or ETF to achieve its investment objective. If the investment company or ETF fails to achieve its investment objective, the value of the Funds investment will decline, adversely affecting the Funds performance. In addition, because closed end investment companies and ETFs are listed on
82 | DIREXION SHARES ETF TRUST PROSPECTUS |
national stock exchanges and are traded like stocks listed on an exchange, their shares potentially may trade at a discount or a premium. Investments in such shares are also subject to brokerage and other trading costs, which could result in greater expenses to a Fund. Finally, because the value of ETF shares depends on the demand in the market, the Adviser may not be able to liquidate a Funds holdings at the most optimal time, adversely affecting the Funds performance.
Shorting Risk
Each 3X Bear Fund may engage in short sales designed to earn the 3X Bear Fund a profit from the decline in the price of particular securities, baskets of securities or indices. Short sales are transactions in which a 3X Bear Fund borrows securities from a broker and sells the borrowed securities. The 3X Bear Fund is obligated to replace the security borrowed by purchasing the security at the market price at the time of replacement. If the market price of the underlying security goes down between the time the 3X Bear Fund sells the security and buys it back, the 3X Bear Fund will realize a gain on the transaction. Conversely, if the underlying security goes up in price during the period, the 3X Bear Fund will realize a loss on the transaction. Any such loss is increased by the amount of premium or interest the Fund must pay to the lender of the security. Likewise, any gain will be decreased by the amount of premium or interest the 3X Bear Fund must pay to the lender of the security. The 3X Bear Funds investment performance may also suffer if the 3X Bear Fund is required to close out a short position earlier than it had intended. This would occur if the securities lender required the 3X Bear Fund to deliver the securities the 3X Bear Fund borrowed at the commencement of the short sale and the 3X Bear Fund was unable to borrow the securities from another securities lender or otherwise obtain the security by other means. In addition, a 3X Bear Fund may be subject to expenses related to short sales that are not typically associated with investing in securities directly, such as costs of borrowing and margin account maintenance costs associated with the 3X Bear Funds open short positions. As the holder of a short position, a 3X Bear Fund also is responsible for paying the dividends and interest accruing on the short position, which is an expense to the 3X Bear Fund that could cause the 3X Bear Fund to lose money on the short sale and may adversely affect its performance.
Small and/or Mid Capitalization Company Risk
Certain Funds may invest in the securities of small and/or mid capitalization companies and securities which provide exposure to small and/or mid capitalization companies. Such investment involves greater risks and the possibility of greater price volatility than investing in more established, larger capitalization companies. Small and mid capitalization companies often have narrower markets for their goods and/or services and more limited managerial and financial resources than larger, more established companies. Furthermore, those companies often have limited product lines, services, markets, financial resources or are dependent on a small management group. In addition, because these stocks are not well-known to the investing public, do not have significant institutional ownership and are followed by relatively few security analysts, there will normally be less publicly available information concerning these securities compared to what is available for the securities of larger companies. Adverse publicity and investor perceptions, whether based on fundamental analysis, can decrease the value and liquidity of securities held by a Fund. As a result, their performance can be more volatile and they face greater risk of business failure, which could increase the volatility of a Funds portfolio.
Tax and Distribution Risk
The Funds have extremely high portfolio turnover which causes the Funds to generate significant amounts of taxable income. This income is typically short-term capital gain, which is generally treated as ordinary income when distributed to shareholders, or short-term capital loss. The Funds rarely generate long-term capital gain or loss. Each Fund will generally need to distribute net short-term capital gain to satisfy certain tax requirements. As a result of the Funds high portfolio turnover, the Funds could make larger and/or more frequent distributions than traditional unleveraged ETFs. Because each Funds asset level changes frequently, these distributions could comprise a substantial portion or even all of a Funds net assets if a Fund distributes this income after a decline in its net assets. In addition, a Fund may be held by short-term investors and these investors may exit a Fund prior to the record date of a distribution. As a result, shareholders in the Funds on the day of a distribution may receive substantial distributions, which could lead to negative tax implications for such shareholders. Potential investors are urged to consult their own tax advisers for more detailed information.
Rules governing the federal income tax aspects of certain derivatives, including total return equity swaps, real estate-related swaps, credit default swaps and other credit derivatives are not entirely clear. Because the Funds status as a regulated investment company might be affected if the Internal Revenue Service did not accept the Funds treatment of certain transactions involving derivatives, the Funds ability to engage in these transactions may be limited.
Tracking Error Risk
Several factors may affect a Funds ability to achieve its daily target. A Fund may have difficulty achieving its daily target due to fees and expenses, high portfolio turnover,
DIREXION SHARES ETF TRUST PROSPECTUS | 83 |
transaction costs, and/or a temporary lack of liquidity in the markets for the securities held by a Fund. A failure to achieve a daily target may cause a Fund to provide returns for a longer period that are worse than expected. In addition, a Fund that meets its daily target for a period of time may not necessarily produce the returns that might be expected in light of the returns of its index or benchmark for that period.
Valuation Time Risk
Each Fund values its portfolio as of the close of regular trading on the New York Stock Exchange (NYSE) (generally 4:00 P.M. Eastern time). In some cases, foreign market indices close before the NYSE opens or may not be open for business on the same calendar days as the Funds. As a result, the daily performance of a Fund that tracks a foreign market index can vary from the performance of that index.
Trading Issues . Trading in Shares on the Exchange may be halted due to market conditions or for reasons that, in the view of the Exchange, make trading in Shares inadvisable, such as extraordinary market volatility or other reasons. There can be no assurance that Shares will continue to meet the listing requirements of the Exchange, and the listing requirements may be amended from time to time.
Market Price Variance Risk . Individual Shares of a Fund that are listed for trading on the Exchange can be bought and sold in the secondary market at market prices. The market prices of Shares will fluctuate in response to changes in NAV and supply and demand for Shares. The Adviser cannot predict whether Shares will trade above, below or at their NAV. Differences between secondary market prices and NAV for Shares may be due largely to supply and demand forces in the secondary market, which forces may not be the same as those influencing prices for securities or instruments held by a Fund at a particular time. Given the fact that Shares can be created and redeemed in Creation Units, the Adviser believes that large discounts or premiums to the NAV of Shares should not be sustained. There may, however, be times when the market price and the NAV vary significantly and you may pay more than NAV when buying Shares on the secondary market, and you may receive less than NAV when you sell those Shares. The market price of Shares, like the price of any exchange-traded security, includes a bid-ask spread charged by the exchange specialists, market makers or other participants that trade the particular security. In times of severe market disruption, the bid-ask spread often increases significantly. This means that Shares may trade at a discount to NAV and the discount is likely to be greatest when the price of Shares is falling fastest, which may be the time that you most want to sell your Shares. A Funds investment results are measured based upon the daily NAV of the Fund over a period of time. Investors purchasing and selling Shares in the secondary market may not experience investment results consistent with those experienced by those creating and redeeming directly with a Fund. There is no guarantee that an active secondary market will develop for Shares of the Funds.
A Precautionary Note to Retail Investors . The Depository Trust Company (DTC), a limited trust company and securities depositary that serves as a national clearinghouse for the settlement of trades for its participating banks and broker-dealers, or its nominee will be the registered owner of all outstanding Shares of each Fund of the Trust. Your ownership of Shares will be shown on the records of DTC and the DTC Participant broker through whom you hold the Shares. THE TRUST WILL NOT HAVE ANY RECORD OF YOUR OWNERSHIP. Your account information will be maintained by your broker, who will provide you with account statements, confirmations of your purchases and sales of Shares, and tax information. Your broker also will be responsible for ensuring that you receive shareholder reports and other communications from the Fund whose Shares you own. Typically, you will receive other services ( e.g. , average basis information) only if your broker offers these services.
A Precautionary Note to Purchasers of Creation Units . You should be aware of certain legal risks unique to investors purchasing Creation Units directly from the issuing Fund. Because new Shares may be issued on an ongoing basis, a distribution of Shares could be occurring at any time. As a dealer, certain activities on your part could, depending on the circumstances, result in your being deemed a participant in the distribution, in a manner that could render you a statutory underwriter and subject you to the prospectus delivery and liability provisions of the Securities Act of 1933, as amended (Securities Act). For example, you could be deemed a statutory underwriter if you purchase Creation Units from an issuing Fund, break them down into the constituent Shares and sell those Shares directly to customers, or if you choose to couple the creation of a supply of new Shares with an active selling effort involving solicitation of secondary market demand for Shares. Whether a person is an underwriter depends upon all of the facts and circumstances pertaining to that persons activities, and the examples mentioned here should not be considered a complete description of all the activities that could cause you to be deemed an underwriter. Dealers who are not underwriters, but are participating in a distribution (as opposed to engaging in ordinary secondary market transactions), and thus dealing with Shares as part of an unsold allotment within the meaning of Section 4(3)(C) of the Securities Act, will be unable to take advantage of the prospectus delivery exemption provided by Section 4(3) of the Securities Act.
84 | DIREXION SHARES ETF TRUST PROSPECTUS |
A Precautionary Note to Investment Companies . For purposes of the Investment Company Act of 1940, as amended (1940 Act) each Fund is a registered investment company, and the acquisition of Shares by other investment companies is subject to the restrictions of Section 12(d)(1) thereof.
The Trust and the Funds have obtained an exemptive order from the U.S. Securities and Exchange Commission (the SEC) allowing a registered investment company to invest in a Fund beyond the limits of Section 12(d)(1) subject to certain conditions, including that a registered investment company enters into a Participation Agreement with the Trust regarding the terms of the investment. Any investment company considering purchasing Shares of a Fund in amounts that would cause it to exceed the restrictions under Section 12(d)(1) should contact the Trust.
A Precautionary Note Regarding Unusual Circumstances . The Trust can postpone payment of redemption proceeds for any period during which (1) the Exchange is closed other than customary weekend and holiday closings, (2) trading on the Exchange is restricted, as determined by the SEC, (3) any emergency circumstances exist, as determined by the SEC, or (4) the SEC by order permits for the protection of shareholders of a Fund.
The Funds are not sponsored, endorsed, sold or promoted by Morgan Stanley Capital International Inc. (MSCI), any of its affiliates, any of its information providers or any other third party involved in, or related to, compiling, computing or creating any MSCI Index (collectively, the MSCI Parties). The MSCI Indexes are the exclusive property of MSCI. MSCI and the MSCI Index names are service marks of MSCI or its affiliates and have been licensed for use for certain purposes by the Trust. None of the MSCI Parties makes any representation or warranty, express or implied, to the issuer or shareholders of these Funds or any other person or entity regarding the advisability of investing in Funds generally or in these Funds particularly or the ability of any MSCI Index to track corresponding stock market performance. MSCI or its affiliates are the licensors of certain trademarks, service marks and trade names and of the MSCI Indexes which are determined, composed and calculated by MSCI without regard to the Funds or the issuer or shareholders of the Funds or any other person or entity into consideration in determining, composing or calculating the MSCI Indexes. None of the MSCI Parties is responsible for or has participated in the determination of the timing of, prices at, or quantities of these Funds to be issued or in the determination or calculation of the equation by or the consideration into which these Funds are redeemable. Further, none of the MSCI Parties has any obligation or liability to the issuer or owners of these Funds or any other person or entity in connection with the administration, marketing or offering of these Funds.
Although MSCI shall obtain information for inclusion in or for use in the calculation of the MSCI Indexes from sources that MSCI considers reliable, none of the MSCI Parties warrants or guarantees the originality, accuracy and/or the completeness of any MSCI Index or any data included therein. None of the MSCI Parties makes any warranty, express or implied, as to results to be obtained by the issuer of the Funds, shareholders of the Funds, or any other person or entity, from the use of any MSCI Index or any data included therein. None of the MSCI Parties shall have any liability for any errors, omissions or interruptions of or in connection with any MSCI Index or any data included therein. Further, none of the MSCI Index or any data included therein. Further, none of the MSCI Parties makes any express or implied warranties of any kind, and the MSCI Parties hereby expressly disclaim all warranties of merchantability and fitness for a particular purpose, with respect to each MSCI Index and any data included therein. Without limiting any of the foregoing, in no event shall any of the MSCI Parties have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages. No purchaser, seller or holder of this security, product or fund, or any other person or entity, should use or refer to any MSCI trade name, trademark or service mark to sponsor, endorse, market or promote this security without first contacting MSCI to determine whether MSCIs permission is required. Under no circumstances may any person or entity claim any affiliation with MSCI without the prior written permission of MSCI.
Each Fund issues and redeems Shares only in large blocks of Shares called Creation Units.
Most investors will buy and sell Shares of each Fund in secondary market transactions through brokers. Shares of each Fund that are listed for trading on the secondary market on the Exchange can be bought and sold throughout the trading day like other publicly traded shares. There is no minimum investment. Although Shares are generally purchased and sold in round lots of 50,000 Shares,
DIREXION SHARES ETF TRUST PROSPECTUS | 85 |
brokerage firms typically permit investors to purchase or sell Shares in smaller oddlots at no per-share price differential.
When buying or selling Shares through a broker, you will incur customary brokerage commissions and charges, and you may pay some or all of the spread between the bid and the offer price in the secondary market on each leg of a round trip (purchase and sale) transaction. In addition, because secondary market transactions occur at market prices, you may pay more than NAV when you buy Shares, and receive less than NAV when you sell those Shares.
The Funds Exchange trading symbols are as follows:
Fund | Symbol | |||
Direxion Daily Chile Bull 3X Shares |
||||
Direxion Daily Chile Bear 3X Shares |
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Direxion Daily Hong Kong Bull 3X Shares |
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Direxion Daily Hong Kong Bear 3X Shares |
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Direxion Daily Japan Bull 3X Shares |
JPNL | |||
Direxion Daily Japan Bear 3X Shares |
JPNS | |||
Direxion Daily Mexico Bull 3X Shares |
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Direxion Daily Mexico Bear 3X Shares |
Share prices are reported in dollars and cents per Share.
Investors may acquire Shares directly from each Fund, and shareholders may tender their Shares for redemption directly to each Fund, only in Creation Units, as discussed in the Creations, Redemptions and Transaction Fees section below. A Creation Unit consists of 50,000 Shares.
For information about acquiring Shares through a secondary market purchase, please contact your broker. If you wish to sell Shares of a Fund on the secondary market, you must do so through your broker.
Book Entry. Shares are held in book-entry form, which means that no stock certificates are issued. The DTC or its nominee is the record owner of all outstanding Shares of the Funds and is recognized as the owner of all Shares for all purposes.
Investors owning Shares are beneficial owners as shown on the records of the DTC or its participants. DTC serves as the securities depository for all Shares. Participants in the DTC include securities brokers and dealers, banks, trust companies, clearing corporations and other institutions that directly or indirectly maintain a custodial relationship with DTC. As a beneficial owner of Shares, you are not entitled to receive physical delivery of stock certificates or to have Shares registered in your name, and you are not considered a registered owner of Shares. Therefore, to exercise any right as an owner of Shares, you must rely upon the procedures of DTC and its participants. These procedures are the same as those that apply to any other stocks that you hold in book entry or street name through your brokerage account.
Share Price of the Funds
A Funds share price is known as its NAV. Each Fund calculates its NAV as of the close of regular trading on the NYSE, usually 4:00 p.m. Eastern Time, each day the NYSE is open for business (Business Day.) The NYSE is open every week, Monday through Friday, except when the following holidays are celebrated: New Years Day, Martin Luther King, Jr. Day (the third Monday in January), Presidents Day (the third Monday in February), Good Friday, Memorial Day (the last Monday in May), July 4th, Labor Day (the first Monday in September), Thanksgiving Day (the fourth Thursday in November) and Christmas Day. The NYSE may close early on the Business Day before each of these holidays and on the day after Thanksgiving Day. NYSE holiday schedules are subject to change without notice.
If the exchange or market on which a Funds investments are primarily traded closes early, the NAV may be calculated prior to its normal calculation time. Creation/redemption transaction order time cutoffs would also be accelerated. The value of a Funds assets that trade in markets outside the United States or in currencies other than the U.S. dollar may fluctuate when foreign markets are open but the Funds are not open for business.
Share price is calculated by dividing a Funds net assets by its shares outstanding. In calculating its NAV, each Fund generally values its assets on the basis of market quotations, last sale prices, or estimates of value furnished by a pricing service or brokers who make markets in such instruments. If such information is not available for a security held by the Fund, is determined to be unreliable, or (to the Advisers knowledge) does not reflect a significant event occurring after the close of the market on which the security principally trades (but before the close of trading on the NYSE), the security will be valued at fair value estimates by the Adviser under guidelines established by the Board of Trustees. Foreign securities, currencies and other assets denominated in foreign currencies are translated into U.S. dollars at the exchange rate of such currencies against the U.S. Dollar, as provided by an independent pricing service or reporting agency. The Funds also rely on a pricing service in circumstances where the U.S. securities markets exceed a pre-determined threshold to value foreign securities held in the Funds portfolio. The pricing service, its methodology or the threshold may change from time to time. Debt obligations with maturities of 60 days or less are valued at amortized cost.
Fair Value Pricing. Securities are priced at a fair value as determined by the Adviser, under the oversight of the Board
86 | DIREXION SHARES ETF TRUST PROSPECTUS |
of Trustees, when reliable market quotations are not readily available, the Funds pricing service does not provide a valuation for such securities, the Funds pricing service provides a valuation that in the judgment of the Adviser does not represent fair value, the Adviser believes that the market price is stale, or an event that affects the value of an instrument (a Significant Event) has occurred since closing prices were established, but before the time as of which the Funds calculate their NAVs. Examples of Significant Events may include: (1) events that relate to a single issuer or to an entire market sector; (2) significant fluctuations in domestic or foreign markets; or (3) occurrences not tied directly to the securities markets, such as natural disasters, armed conflicts, or significant government actions. If such Significant Events occur, the Funds may value the instruments at fair value, taking into account such events when it calculates each Funds NAV. Fair value determinations are made in good faith in accordance with procedures adopted by the Board of Trustees. In addition, the Funds may also fair value an instrument if trading in a particular instrument is halted and does not resume prior to the closing of the exchange or other market.
Attempts to determine the fair value of securities introduce an element of subjectivity to the pricing of securities. As a result, the price of a security determined through fair valuation techniques may differ from the price quoted or published by other sources and may not accurately reflect the market value of the security when trading resumes. If a reliable market quotation becomes available for a security formerly valued through fair valuation techniques, Rafferty compares the market quotation to the fair value price to evaluate the effectiveness of the Funds fair valuation procedures and will use that market value in the next calculation of NAV.
Rule 12b-1 Fees
The Board of Trustees of the Trust has adopted a Distribution and Service Plan (the Plan) pursuant to Rule 12b-1 under the 1940 Act. In accordance with the Plan, each Fund is authorized to pay an amount up to 0.25% of its average daily net assets each year for certain distribution-related activities and shareholder services.
No 12b-1 fees are currently paid by any Fund, and there are no plans to impose these fees. However, in the event 12b-1 fees are charged in the future, because the fees are paid out of each Funds assets, over time these fees will increase the cost of your investment and may cost you more than certain other types of sales charges.
Rafferty expects a significant portion of the Funds assets to come from professional money managers and investors who use the Funds as part of asset allocation and market timing investment strategies. These strategies often call for frequent trading to take advantage of anticipated changes in market conditions. Frequent trading of Fund Shares could increase the rate of creations and redemptions of Fund Shares and the Funds portfolio turnover, which could involve correspondingly adverse tax consequences to a Funds shareholders. Although the Funds reserve the right to reject any purchase orders or suspend the offering of Shares, the Funds do not currently impose any trading restrictions on frequent trading nor actively monitor for trading abuses.
CREATIONS, REDEMPTIONS AND TRANSACTION FEES
Creation Units. Investors such as market makers, large investors and institutions who wish to deal in Creation Units directly with a Fund must have entered into an authorized participant agreement with the principal underwriter and the transfer agent, or purchase through a dealer that has entered into such an agreement. These investors are known as Authorized Participants. Set forth below is a brief description of the procedures applicable to the purchase and redemption of Creation Units.
Purchase of 3X Bull Funds. To purchase Creation Units directly from a 3X Bull Fund, you must deposit with the Fund a basket of securities and/or cash. Each Business Day, prior to the opening of trading on the Exchange, an agent of the Fund (Index Receipt Agent) will make available through the NSCC a list of the names and number of shares of each security, if any, to be included in that days creation basket (Deposit Securities). The identity and number of shares of the Deposit Securities required for a Creation Unit will change from time to time. Each 3X Bull Fund reserves the right to permit or require the substitution of an amount of cash i.e. , a cash in lieu amount to be added to the Balancing Amount (defined below) to replace any Deposit Security that may not be available in sufficient quantity for delivery, eligible for transfer through the clearing process (discussed below) or the Federal Reserve System or eligible for trading by an Authorized Participant or the investor for which it is acting. For such custom orders, cash in lieu may be added to the Balancing Amount (defined below). The Balancing Amount and any cash in lieu must be paid to the
DIREXION SHARES ETF TRUST PROSPECTUS | 87 |
Trust on or before the third Business Day following the Transmittal Date. You must also pay a Transaction Fee, described below, in cash.
In addition to the in-kind deposit of securities, Authorized Participants will either pay to, or receive from, a 3X Bull Fund an amount of cash referred to as the Balancing Amount. The Balancing Amount is the amount equal to the differential, if any, between the market value of the Deposit Securities and the NAV of a Creation Unit. The Fund will publish, on a daily basis, information about the previous days Balancing Amount. The Balancing Amount may, at times, represent a significant portion of the aggregate purchase price (or, in the case of redemptions, the redemption proceeds). This is because the mark-to-market value of the financial instruments held by the Funds will be included in the Balancing Amount (not in the Deposit Basket or Redemption Basket). The Balancing Amount for the 3X Bull Funds may fluctuate significantly due to the leveraged nature of the 3X Bull Funds.
All purchase orders for Creation Units must be placed by or through an Authorized Participant. Purchase orders will be processed either through a manual clearing process run at the DTC (Manual Clearing Process) or through an enhanced clearing process (Enhanced Clearing Process) that is available only to those DTC participants that also are participants in the Continuous Net Settlement System of the National Securities Clearing Corporation (NSCC). Authorized Participants that do not use the Enhanced Clearing Process will be charged a higher Transaction Fee (discussed below). A purchase order must be received in good order by the transfer agent by 4:00 p.m. Eastern Time, whether transmitted by mail, through the transfer agents automated system, telephone, facsimile or other means permitted under the Participant Agreement, in order to receive that days NAV per Share. All other procedures set forth in the Participant Agreement must be followed in order for you to receive the NAV determined on that day.
Shares may be issued in advance of receipt of Deposit Securities subject to various conditions including a requirement to maintain on deposit with the Trust cash in an amount up to 115% of the market value of the missing Deposit Securities. Any such transaction effected with the Trust must be effected using the Manual Clearing Process consistent with the terms of the Authorized Participant Agreement.
Purchase of 3X Bear Funds. The 3X Bear Funds only accept cash to purchase Creation Units. The purchaser must transfer cash in an amount equal to the value of the Creation Unit(s) purchased and the applicable Transaction Fee. All purchase orders will be processed through the Manual Clearing Process. The Trust will deliver Shares of the 3X Bear Funds upon payment of cash to the Trust on or before the third Business Day following the Transmittal Date consistent with the terms of the Authorized Participant Agreement.
Redemption from a 3X Bull Fund. Redemption proceeds will be paid either in cash or in-kind with a basket of securities (Redemption Securities). In most cases, Redemption Securities will be the same as Deposit Securities on a given day. There will be times, however, when the Deposit and Redemption Securities differ. The composition of the Redemption Securities will be available through the NSCC. Each Fund reserves the right to honor a redemption request with a non-conforming redemption basket.
If the value of a Creation Unit is higher than the value of the Redemption Securities, you will receive from the Fund a Balancing Amount in cash. If the value of a Creation Unit is lower than the value of the Redemption Securities, you will be required to pay to the Fund a Balancing Amount in cash. If you are receiving a Balancing Amount, the amount due will be reduced by the amount of the applicable Transaction Fee.
As with purchases, redemptions may be processed either through the Manual Clearing Process or the Enhanced Clearing Process. A redemption order must be received in good order by the transfer agent by 4:00 p.m. Eastern Time, whether transmitted by mail, through the transfer agents automated system, telephone, facsimile or other means permitted under the Participant Agreement, in order to receive that days NAV per Share. All other procedures set forth in the Participant Agreement must be followed in order for you to receive the NAV determined on that day.
An investor may request a redemption in cash, which a 3X Bull Fund may in its sole discretion permit. Investors that elect to receive cash in lieu of one or more of the Redemption Securities are subject to an additional charge. Redemptions of Creation Units for cash (when available) and/or outside of the Enhanced Clearing Process also require the payment of an additional charge.
Redemption from 3X Bear Funds. Redemption proceeds will be paid in cash. As with purchases, redemptions may be processed either through the Manual Clearing Process or the Enhanced Clearing Process. A redemption order must be received in good order by the transfer agent by 4:00 p.m. Eastern Time, whether transmitted by mail, through the transfer agents automated system, telephone, facsimile or other means permitted under the Participant Agreement in order to receive that days NAV per Share. All other procedures set forth in the Participant Agreement must be followed in order for you to receive the NAV determined on that day.
88 | DIREXION SHARES ETF TRUST PROSPECTUS |
Transaction Fees on Creation and Redemption Transactions. Each Fund will impose Transaction Fees to offset transfer and other transaction costs associated with the issuance and redemption of Creation Units. There is a fixed and a variable component to the total Transaction Fee on transactions in Creation Units. A fixed Transaction Fee is applicable to each creation and redemption transaction, regardless of the number of Creation Units transacted. A variable Transaction Fee based upon the value of each Creation Unit also is applicable to each redemption transaction. Purchasers and redeemers of Creation Units of the Funds effected through the Manual Clearing Process are required to pay an additional charge to compensate for brokerage and other expenses. In addition, purchasers of Creation Units are responsible for payment of the costs of transferring the Deposit Securities to the Trust. However, in no instance will the fees charged exceed 2% of the value of the Creation Units subject to the transaction. Redeemers of Creation Units are responsible for the costs of transferring securities from the Trust. Investors who use the services of a broker or other such intermediary may pay additional fees for such services. In addition, Rafferty may, from time to time, at its own expense, compensate purchasers of Creation Units who have purchased substantial amounts of Creation Units and other financial institutions for administrative or marketing services.
The table on the next page summarizes the components of the Transaction Fees.
Fixed Transaction Fee |
Maximum
Additional Charge for Purchases and Redemptions* |
|||||||||||
In-Kind | Cash | |||||||||||
Direxion Shares ETF Trust | NSCC | Outside NSCC |
Outside
NSCC |
|||||||||
Direxion Daily Chile Bull 3X Shares |
$250 | Up to 300% of NSCC Amount | $250 | Up to 0.50% | ||||||||
Direxion Daily Chile Bear 3X Shares |
N/A | N/A | $250 | Up to 0.50% | ||||||||
Direxion Daily Hong Kong Bull 3X Shares |
$250 | Up to 300% of NSCC Amount | $250 | Up to 0.50% | ||||||||
Direxion Daily Hong Kong Bear 3X Shares |
N/A | N/A | $250 | Up to 0.50% | ||||||||
Direxion Daily Japan Bull 3X Shares |
$250 | Up to 300% of NSCC Amount | $250 | Up to 0.50% | ||||||||
Direxion Daily Japan Bear 3X Shares |
N/A | N/A | $250 | Up to 0.50% | ||||||||
Direxion Daily Mexico Bull 3X Shares |
$250 | Up to 300% of NSCC Amount | $250 | Up to 0.50% | ||||||||
Direxion Daily Mexico Bear 3X Shares |
N/A | N/A | $250 | Up to 0.50% |
* | As a percentage of the amount invested. |
Rafferty provides investment management services to the Funds. Rafferty has been managing investment companies since 1997. Rafferty is located at 1301 Avenue of the Americas (6th Avenue), 35th Floor, New York, New York 10019. As of March 31, 2013, the Adviser had approximately $6.5 billion in assets under management.
Under an investment advisory agreement between the Trust and Rafferty, the Funds pay Rafferty the following fees at an annualized rate based on a percentage of the Funds daily net assets.
Advisory Fees Charged | ||||
All Funds | 0.75% |
Rafferty has entered into an Operating Expense Limitation Agreement with each Fund. Under this Operating Expense Limitation Agreement, Rafferty, has contractually agreed to cap all or a portion of its management fee and/or reimburse the Fund for Other Expenses through March 1, 2015, to the extent that each Funds Total Annual Operating Expenses exceed 0.95% (excluding, as applicable, among other expenses, taxes, leverage interest, Acquired Fund Fees and Expenses, dividends or interest on short positions, other interest expenses, brokerage commissions, expenses incurred in connection with any merger or reorganization and extraordinary expenses such as litigation). Any expense cap is subject to reimbursement by a Fund only within the following three years only if overall expenses fall below these percentage limitations. This agreement may be terminated or revised at any time with the consent of the Board of Trustees.
A discussion regarding the basis on which the Board of Trustees approved the investment advisory agreements for the Funds will be available in the Trusts annual report to shareholders for the fiscal year ended October 31, 2013.
An investment team of Rafferty employees has the day-to-day responsibility for managing the Funds. The investment team generally decides the target allocation of each Funds investments and on a day-to-day basis, an individual portfolio manager executes transactions for the Funds consistent with the target allocation. The portfolio managers rotate among the Funds periodically so that no single portfolio manager is responsible for a specific Fund for
DIREXION SHARES ETF TRUST PROSPECTUS | 89 |
extended periods of time. Paul Brigandi, each Funds Portfolio Manager, is primarily responsible for the day-to-day management of the Funds.
Mr. Brigandi has been a Portfolio Manager at Rafferty since June 2004. Mr. Brigandi was previously involved in the equity trading training program for Fleet Boston Financial Corporation from August 2002 to April 2004. Mr. Brigandi is a 2002 graduate of Fordham University.
The Funds SAI provides additional information about the investment team members compensation, other accounts they manage and their ownership of securities in the Funds.
A description of the Funds policies and procedures with respect to the disclosure of the Funds portfolio securities is available in the Funds SAI.
Foreside Fund Services, LLC (Distributor) serves as the Funds distributor. U.S. Bancorp Fund Services, LLC serves as the Funds administrator. Bank of New York Mellon serves as the Funds transfer agent, custodian and index receipt agent. The Distributor is not affiliated with the Adviser, Rafferty or the Funds transfer agent.
Rafferty may, from time to time, at its own expense, compensate purchasers of Creation Units who have purchased substantial amounts of Creation Units and other financial institutions for administrative or marketing services. These payments may be made from profits received by Rafferty from management fees paid to Rafferty by the Funds. Such activities by Rafferty may provide incentives to financial institutions to purchase or market shares of the Funds. Additionally, these activities may give Rafferty additional access to sales representatives of such financial institutions, which may increase sales of a Funds shares.
Fund Distributions. Each Fund pays out dividends from its net investment income, and distributes any net capital gains, if any, to its shareholders at least annually. Each Fund is authorized to declare and pay capital gain distributions in additional Shares thereof or in cash. The Funds have extremely high portfolio turnover, which may cause them to generate significant amounts of taxable income. The Funds will generally need to distribute net short-term capital gain to satisfy certain tax requirements. Because of the Funds high portfolio turnover, they could need to make larger and/or more frequent distributions than traditional unleveraged ETF.
Dividend Reinvestment Service. Brokers may make the DTC book-entry dividend reinvestment service (Reinvestment Service) available to their customers who are shareholders of a Fund. If the Reinvestment Service is used with respect to a Fund, its distributions of both net income and capital gains will automatically be reinvested in additional and fractional Shares thereof purchased in the secondary market. Without the Reinvestment Service, investors will receive Fund distributions in cash, except as noted above under Fund Distributions. To determine whether the Reinvestment Service is available and whether there is a commission or other charge for using the service, consult your broker. Fund shareholders should be aware that brokers may require them to adhere to specific procedures and timetables to use the Reinvestment Service.
As with any investment, you should consider the tax consequences of buying, holding, and disposing of Shares. The tax information in this Prospectus is only a general summary of some important federal tax considerations generally affecting the Funds and their shareholders. No attempt is made to present a complete explanation of the
90 | DIREXION SHARES ETF TRUST PROSPECTUS |
federal tax treatment of the Funds activities, and this discussion is not intended as a substitute for careful tax planning. Accordingly, potential investors are urged to consult their own tax advisers for more detailed information and for information regarding any state, local, or foreign taxes applicable to the Funds and to an investment in Shares.
Fund distributions to you and your sale of your Shares will have tax consequences to you unless you hold your Shares through a tax-exempt entity or tax-deferred retirement arrangement, such as an individual retirement account or 401(k) plan.
Each Fund intends to qualify or to continue to qualify each taxable year for taxation as a regulated investment company. If a Fund so qualifies and satisfies certain distribution requirements, the Fund will not be subject to federal income tax on income that is distributed in a timely manner to its shareholders in the form of income dividends or capital gain distributions.
Taxes on Distributions. Dividends from a Funds investment company taxable income generally, the sum of net investment income, the excess of net short-term capital gain over net long-term capital loss, and net gains and losses from certain foreign currency transactions, if any, all determined without regard to any deduction for dividends paid will be taxable to you as ordinary income to the extent of its earnings and profits, whether they are paid in cash or reinvested in additional Shares. However, dividends a Fund pays to you that are attributable to its qualified dividend income ( i.e., dividends it receives on stock of most domestic and certain foreign corporations with respect to which it satisfies certain holding period and other restrictions) generally will be taxed to you, if you are an individual, trust, or estate and satisfy those restrictions with respect to your Shares, for federal income tax purposes, at the rates of 15% for a single shareholder with taxable income not exceeding $400,000 ($450,000 for married shareholders filing jointly) and 20% for other such shareholders with taxable income exceeding those respective amounts. A portion of a Funds dividends also may be eligible for the dividends-received deduction allowed to corporations the eligible portion may not exceed the aggregate dividends the Fund receives from domestic corporations subject to federal income tax (excluding real estate investment trusts) and excludes dividends from foreign corporations subject to similar restrictions; however, dividends a corporate shareholder deducts pursuant to that deduction are subject indirectly to the federal alternative minimum tax. None of the Funds expects to earn a significant amount of income that would qualify for those maximum rates or that deduction.
Distributions of a Funds net capital gain (which is the excess of net long-term capital gain over net short-term capital loss) that it recognizes on sales or exchanges of capital assets will be taxable to you as long-term capital gains, at the maximum rates mentioned above if you are an individual, trust, or estate, regardless of your holding period for the Shares on which the distributions are paid and regardless of whether they are paid in cash or reinvested in additional Shares. A Funds capital gain distributions may vary considerably from one year to the next as a result of its investment activities and cash flows and the performance of the markets in which it invests.
Distributions in excess of a Funds current and accumulated earnings and profits first will reduce your adjusted tax basis in your Shares in that Fund and, after that basis is reduced to zero, will constitute capital gain. That capital gain will be long-term capital gain, and thus will be taxed at the maximum rates mentioned above if you are an individual, trust, or estate if the distributions are attributable to Shares you held for more than one year.
Investors should be aware that the price of Shares at any time may reflect the amount of a forthcoming dividend or capital gain distribution, so if they purchase Shares shortly before the record date for an income dividend or capital gain distribution, they will pay full price for the Shares and receive some part of the purchase price back as a taxable distribution even though it represents a partial return of invested capital.
In general, distributions are subject to federal income tax for the year when they are paid. However, certain distributions paid in January may be treated as paid on December 31 of the prior year.
Because of high portfolio turnover, the Funds may generate significant amounts of taxable income. Accordingly, the Funds may need to make larger and/or more frequent distributions than traditional unleveraged ETFs. A substantial portion of that income typically will be short-term capital gain, which will generally be treated as ordinary income when distributed to shareholders.
Fund distributions to tax-deferred or qualified plans, such as an IRA, retirement plan or pension plan, generally will not be taxable. However, distributions from such plans will be taxable to the individual participant notwithstanding the character of the income earned by the qualified plan. Please consult a tax adviser for a more complete explanation of the federal, state, local and foreign tax consequences of investing in a Fund through such a plan.
Taxes When Shares are Sold. Generally, you will recognize taxable gain or loss if you sell or otherwise dispose of your Shares. Any gain arising from such a disposition generally will be treated as long-term capital gain if you held the Shares for more than one year, taxable at the maximum
DIREXION SHARES ETF TRUST PROSPECTUS | 91 |
rates mentioned above if you are an individual, trust, or estate; otherwise, the gain will be treated as short-term capital gain. However, any capital loss arising from the disposition of Shares held for six months or less will be treated as long-term capital loss to the extent of capital gain distributions received with respect to those Shares. In addition, all or a portion of any loss recognized on a sale or exchange of Shares will be disallowed to the extent other Shares of the same Fund are purchased (whether through reinvestment of distributions or otherwise) within a period of 61 days beginning 30 days before and ending 30 days after the date of the sale or exchange; in that event, the basis in the newly purchased Shares will be adjusted to reflect the disallowed loss.
Holders of Creation Units. A person who purchases Shares of a 3X Bull Fund by exchanging securities for a Creation Unit generally will recognize capital gain or loss equal to the difference between the market value of the Creation Unit and the persons aggregate basis in the exchanged securities, adjusted for any Balancing Amount paid or received. A shareholder who redeems a Creation Unit generally will recognize gain or loss to the same extent and in the same manner as described above under Taxes When Shares are Sold.
Miscellaneous. Backup Withholding. A Fund must withhold and remit to the U.S. Treasury 28% of dividends and capital gain distributions otherwise payable to any individual or certain other non-corporate shareholder who fails to certify that the social security or other taxpayer identification number furnished to the Fund is correct or who furnishes an incorrect number (together with the withholding described in the next sentence, backup withholding). Withholding at that rate also is required from a Funds dividends and capital gain distributions otherwise payable to such a shareholder who is subject to backup withholding for any other reason. Backup withholding is not an additional tax, and any amounts so withheld may be credited against a shareholders federal income tax liability or refunded.
Additional Tax . For taxable years beginning after December 31, 2012, an individual must pay a 3.8% federal tax on the lesser of (1) the individuals net investment income, which generally includes dividends, interest, and net gains from the disposition of investment property (including dividends and capital gain distributions a Fund pays), or (2) the excess of the individuals modified adjusted gross income over a threshold amount ($250,000 for married persons filing jointly and $200,000 for single taxpayers). This tax is in addition to any other taxes due on that income. A similar tax will apply for those years to estates and trusts. Shareholders should consult their own tax advisers regarding the effect, if any, this provision may have on their investment in Fund shares.
Basis Determination . A shareholder who wants to use the average basis method for determining basis in Shares he or she acquires after December 31, 2011 (Covered Shares), must elect to do so in writing (which may be electronic) with the broker through which he or she purchased the Shares. A shareholder who wishes to use a different IRS-acceptable method for basis determination ( e.g. , a specific identification method) may elect to do so. Fund shareholders are urged to consult with their brokers regarding the application of the basis determination rules to them.
You may also be subject to state and local taxes on Fund distributions and dispositions of Shares.
Non-U.S. Shareholders. A non-U.S. shareholder is an investor that, for federal tax purposes, is a nonresident alien individual, a foreign corporation or a foreign estate or trust. Except where discussed otherwise, the following disclosure assumes that a non-U.S. shareholders ownership of Shares in a Fund is not effectively connected with a trade or business conducted by such non-U.S. shareholder in the United States and does not address non-U.S. shareholders who are present in the United States for 183 days or more during the taxable year. The tax consequences to a non-U.S. shareholder entitled to claim the benefits of an applicable tax treaty may be different from those described herein. Non-U.S. shareholders should consult their tax advisers with respect to the particular tax consequences to them of an investment in a Fund.
Withholding. Dividends paid by a Fund to non-U.S. shareholders will be subject to withholding tax at a 30% rate or a reduced rate specified by an applicable income tax treaty to the extent derived from investment income (other than qualified interest income or qualified short-term capital gains, as described below). In order to obtain a reduced rate of withholding, a non-U.S. shareholder will be required to provide an IRS Form W-8BEN (or substitute form) certifying its entitlement to benefits under a treaty. The withholding tax does not apply to regular dividends paid to a non-U.S. shareholder who provides an IRS Form W-8ECI, certifying that the dividends are effectively connected with the non-U.S. shareholders conduct of a trade or business within the United States. Instead, the effectively connected dividends will be subject to regular U.S. income tax as if the non-U.S. shareholder were a U.S. shareholder. A non-U.S. corporations earnings and profits attributable to such dividends may also be subject to additional branch profits tax imposed at a rate of 30% (or lower treaty rate).
A non-U.S. shareholder who fails to provide an IRS Form W-8BEN or other applicable form may be subject to backup withholding at the appropriate rate. See the discussion of backup withholding under Miscellaneous above.
92 | DIREXION SHARES ETF TRUST PROSPECTUS |
Exemptions from Withholding. In general, federal income tax will not apply to gain realized on the sale or other disposition of Shares or to any Fund distributions reported as capital gain dividends, short-term capital gain dividends, or interest-related dividends.
The exemption for short-term capital gain dividends and interest-related dividends applies only with respect to a Fund taxable year ending on or before October 31, 2014. Short-term capital gain dividends are dividends that are attributable to qualified short-term gain a Fund realizes (generally, the excess of a Funds net short-term capital gain over long-term capital loss for a taxable year, computed with certain adjustments). Interest-related dividends are dividends that are attributable to qualified net interest income from U.S. sources. Depending on its circumstances, a Fund may report all, some or none of its potentially eligible dividends as short-term capital gain dividends and interest-related dividends and/or treat such dividends, in whole or in part, as ineligible for this exemption from withholding. To qualify for the exemption, a non-U.S. shareholder will need to comply with applicable certification requirements relating to its non-U.S. status (including, in general, furnishing an IRS Form W-8BEN or substitute form). In the case of shares held through an intermediary, the intermediary may withhold even if a Fund designates the payment as a short-term capital gain dividend or an interest-related dividend. Non-U.S. shareholders should contact their intermediaries with respect to the application of these rules to their accounts.
FATCA . Pursuant to the Foreign Account Tax Compliance Act (FATCA), each Fund will be required to withhold 30% of (1) income dividends it pays after December 31, 2013, and (2) capital gain distributions and the proceeds of share redemptions it pays after December 31, 2016, to certain non-U.S. shareholders that fail to meet certain information reporting or certification requirements. Those non-U.S. shareholders include foreign financial institutions (FFIs), such as non-U.S. investment funds, and non-financial foreign entities (NFFEs). To avoid withholding under FATCA, (1) an FFI must enter into an information-sharing agreement with the IRS in which it agrees to report identifying information (including name, address, and taxpayer identification number) of the shareholders direct and indirect U.S. owners and (2) an NFFE must provide to the withholding agent a certification and, in certain circumstances, requisite information regarding its U.S. owners, if any. Those non-U.S. shareholders also may fall into certain exempt, excepted, or deemed compliant categories established by regulations and other guidance. A non-U.S. shareholder resident or doing business in a country that has entered into an intergovernmental agreement with the United States to implement FATCA will be exempt from FATCA withholding provided that the shareholder and the applicable foreign government comply with the terms of the agreement. A non-U.S. shareholder that invests in a Fund will need to provide the Fund with documentation properly certifying the entitys status under FATCA (currently proposed as Form W-8BEN-E) to avoid the FATCA withholding. Non-U.S. shareholders should consult their own tax advisors regarding the impact of these requirements on their investment in a Fund.
More information about taxes is in the Funds SAI.
DIREXION SHARES ETF TRUST PROSPECTUS | 93 |
No financial information is available for the Funds because they had not commenced operations prior to the date of this Prospectus.
94 | DIREXION SHARES ETF TRUST PROSPECTUS |
PROSPECTUS
1301 Avenue of the Americas (6th Avenue), 35th Floor |
New York, New York 10019 |
866-476-7523 |
M ORE I NFORMATION ON THE D IREXION S HARES E TF T RUST
Statement of Additional Information (SAI):
The Funds SAI contains more information on the Funds and their investment policies. The SAI is incorporated in this Prospectus by reference (meaning it is legally part of this Prospectus). A current SAI is on file with the Securities and Exchange Commission (SEC).
Annual and Semi-Annual Reports to Shareholders:
The Funds reports will provide additional information on the Funds investment holdings, performance data and a letter discussing the market conditions and investment strategies that significantly affected the Funds performance during that period.
To Obtain the SAI or Fund Reports Free of Charge:
Write to: |
Direxion Shares ETF Trust 1301 Avenue of the Americas (6th Avenue), 35th Floor New York, New York 10019 |
|
Call: | 866-476-7523 | |
By Internet: | www.direxionfunds.com |
These documents and other information about the Funds can be reviewed and copied at the SEC Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling the SEC at (202) 551-8090. Reports and other information about the Funds may be viewed on screen or downloaded from the EDGAR Database on the SECs website at http://www.sec.gov. Copies of these documents may be obtained, after paying a duplicating fee, by electronic request at the following e-mail address: publicinfo@sec.gov, or by writing the SECs Public Reference Section, Washington, D.C. 20549-0102.
SEC File Number: 811-22201
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